[Federal Register Volume 64, Number 226 (Wednesday, November 24, 1999)]
[Proposed Rules]
[Pages 66306-66340]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30480]
[[Page 66305]]
_______________________________________________________________________
Part III
Department of Energy
_______________________________________________________________________
Office of Energy Efficiency and Renewable Energy
_______________________________________________________________________
10 CFR Part 430
Energy Conservation Program for Consumer Products: Energy Conservation
Standards for Central Air Conditioner and Heat Pumps; Proposed Rule
Federal Register / Vol. 64, No. 226 / Wednesday, November 24, 1999 /
Proposed Rules
[[Page 66306]]
DEPARTMENT OF ENERGY
Office of Energy Efficiency and Renewable Energy
10 CFR Part 430
[Docket No. EE-RM/STD-98-440]
RIN 1904-AA77
Energy Conservation Program for Consumer Products: Energy
Conservation Standards for Central Air Conditioners and Heat Pumps
AGENCY: Office of Energy Efficiency and Renewable Energy, Department of
Energy.
ACTION: Supplemental Advance Notice of Proposed Rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Department of Energy publishes this Supplemental Advance
Notice of Proposed Rulemaking (ANOPR) to consider amending the energy
conservation standards for central air conditioners and heat pumps.
The purpose of this Supplemental ANOPR is to provide interested
persons with an opportunity to comment on:
First, the product classes that the Department is planning to
analyze;
Second, the analytical framework, models (e.g., the Government
Regulatory Impact Model (GRIM)), and tools (e.g., a Monte Carlo
sampling methodology, and life-cycle cost (LCC) and national energy
savings (NES) spreadsheets) that the Department has been using in
performing analyses of the impacts of energy conservation standards;
Third, the results of preliminary analyses for the engineering,
LCC, payback and NES contained in the Preliminary Technical Support
Document (TSD): Energy Efficiency Standards for Consumer Products:
Central Air Conditioners and Heat Pumps and summarized in this
Supplemental ANOPR; and
Fourth, the candidate energy conservation standard levels that the
Department has developed from these analyses.
DATES: Written comments must be received by February 7, 2000. The
Department requests 10 copies of the written comments and, if possible,
a computer disk. The Office of Building Research and Standards is
currently using WordPerfect 8.
A public hearing will be held on December 9, 1999, from 9 am-5 pm.
See Section IV of the Supplementary Information for further details.
ADDRESSES: Written comments should be submitted to: U.S. Department of
Energy, Attn: Brenda Edwards-Jones, Office of Energy Efficiency and
Renewable Energy, ``Energy Efficiency Standards for Consumer
Products,'' (Docket No. EE-RM-94-403), EE-431, Forrestal Building, 1000
Independence Avenue, SW, Room 1J-018, Washington, DC 20585, (202) 586-
2945.
The public hearing will be held at the U.S. Department of Energy,
Forrestal Building, 1000 Independence Avenue SW, Room 1E-245,
Washington, DC 20585.
Copies of the Preliminary TSD: Energy Efficiency Standards for
Consumer Products: Central Air Conditioners and Heat Pumps may also be
obtained from: U.S. Department of Energy, Office of Building Research
and Standards, 1000 Independence Avenue, SW, Rm 1J-018, Washington,
D.C. 20585-0121, (202) 586-9127. The Preliminary TSD will also be
available through DOE's web site. The Preliminary TSD provides the
technical details of the analysis that was conducted in support of the
Supplemental ANOPR being issued today.
Public Information: The public may visit the Freedom of Information
Reading Room, located at the US Department of Energy, Forrestal
Building, 1000 Independence Avenue, SW, Room 1E-190, Washington, DC
20585 between the hours of 9 am and 4 pm, Monday through Friday,
(except Federal holidays). Call (202) 586-3142 for information.
For more information concerning public participation in this
rulemaking proceeding, see section IV, ``Public Comment Procedures,''
of this document.
FOR FURTHER INFORMATION CONTACT: Dr. Michael E. McCabe, U.S. Department
of Energy, Office of Energy Efficiency and Renewable Energy, Forrestal
Building, Mail Station EE-41, 1000 Independence Avenue, SW, Washington,
DC 20585-0121, (202) 586-0854, E-mail: Michael.E.McC[email protected].
Edward Levy, Esq., U.S. Department of Energy, Office of General
Counsel, Forrestal Building, Mail Station GC-72, 1000 Independence
Avenue, SW, Washington, DC 20585, (202) 586-9507, E-mail:
Edward.L[email protected].
SUPPLEMENTARY INFORMATION:
I. Introduction
A. Authority
B. Background
1. History
2. Process Improvement
3. Test Procedure
II. Central Air Conditioners and Heat Pumps Analyses
A. Preliminary Market and Technology Assessment
1. Market Assessment
a. General
b. Product Specific
2. Technology Assessment
a. General
b. Product Specific
3. Preliminary Baseline Shipments Forecast
a. General
b. Product Specific
B. Screening Analysis
1. Product Classes
a. General
b. Product Specific
2. Baseline Equipment
a. General
b. Product Specific
3. Technology Screening
a. General
b. Product Specific
C. Engineering Analysis
1. Energy Savings Potential and Production Costs
a. General
b. Product Specific
i. Efficiency-Level Approach
ii. Reverse Engineering Approach
iii. Design Option Approach
iv. Outside Regulatory Changes Affecting the Engineering
Analysis
2. Manufacturing Costs
a. General
b. Product Specific
i. Characterizing Uncertainty
ii. Variability in Costs Among Manufacturers
iii. Proprietary Design
D. Life-Cycle Cost (LCC) and Payback Analysis
1. LCC Spreadsheet Model
a. General
b. Product Specific
i. LCC Analysis
ii. Equipment Prices
iii. Payback Analysis (Distribution of Paybacks)
iv. Rebuttable Payback
2. Preliminary Results
a. General
b. Product Specific
E. Preliminary National Impact Analyses
1. National Energy Savings (NES) Spreadsheet Model
a. General
b. Product Specific
i. Inputs to NES Analysis
ii. Shipments Model
iii. National Net Present Value
2. Preliminary Results
a. General
b. Product Specific
3. Indirect Employment Impacts
a. General
b. Product Specific
F. Consumer Analyses
1. Consumer Sub-group Analysis
a. General
b. Product Specific
2. Consumer Participation
a. General
b. Product Specific
G. Manufacturer Impact Analysis
1. Industry Characterization (Phase 1)
a. General
b. Product Specific
2. Industry Cash Flow (Phase 2)
a. General
b. Product Specific
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3. Manufacturer Sub-Group Analysis (Phase 3)
a. General
b. Product Specific
4. Interview Process
a. General
b. Product Specific
H. Competitive Impact Assessment
a. General
b. Product Specific
I. Utility Analysis
1. Proposed Methodology
a. General
b. Product Specific
J. Environmental Analysis
1. Proposed Methodology
a. General
b. Product Specific
K. Regulatory Impact Analysis
III. Proposed Standards Scenarios
IV. Public Comment Procedures
A. Participation in Rulemaking
B. Written Comment Procedures
C. Issues for Public Comment
V. Review Under Executive Order 12866 and other provisions
I. Introduction
A. Authority
Part B of Title III of the Energy Policy and Conservation Act, Pub.
L. 94-163, as amended by the National Energy Conservation Policy Act,
Pub. L. Law 95-619, the National Appliance Energy Conservation Act of
1987, Pub. L. 100-12, the National Appliance Energy Conservation
Amendments of 1988, Pub. L. 100-357, and the Energy Policy Act of 1992,
Pub. L. 102-486, (EPCA or the Act), created the Energy Conservation
Program for Various Consumer Products other than Automobiles. 42 U.S.C.
6291-6309.
The National Appliance Energy Conservation Act of 1987 amended EPCA
to impose performance standards for central air conditioners and heat
pumps as part of the energy conservation program for consumer products.
EPCA, section 325(d), 42 U.S.C. 6295 (d). EPCA also requires the
Department to publish final rules thereafter, to determine if these
standards should be amended.
Before the Department determines whether to adopt a proposed energy
conservation standard it must first solicit comments on the proposed
standard. EPCA, section 325 (p), 42 U.S.C. 6295 (p). Any new or amended
standard must be designed so as to achieve the maximum improvement in
energy efficiency that is technologically feasible and economically
justified. EPCA, section 325(o)(2)(A), 42 U.S.C. 6295 (o)(2)(A). To
determine whether economic justification exists the Department must
review comments on the proposal and determine that the benefits of the
proposed standard exceed its burdens based to the greatest extent
practicable, weighing the following seven factors:
(1) The economic impact of the standard on the manufacturers and on
the consumers of the products subject to such standard;
(2) The savings in operating costs throughout the estimated average
life of the covered product in the type (or class) compared to any
increase in the price, initial charges, or maintenance expenses for the
covered products that are likely to result directly from the imposition
of the standard;
(3) The total projected amount of energy savings likely to result
directly from the imposition of the standard;
(4) Any lessening of the utility or the performance of the covered
products likely to result from the imposition of the standard;
(5) The impact of any lessening of competition, as determined in
writing by the Attorney General, that is likely to result from the
imposition of the standard;
(6) The need for national energy conservation; and
(7) Other factors the Secretary considers relevant.
EPCA, Section 325(2)(B), 42 U.S.C. 6295(2)(B)
B. Background
1. History
The Energy Policy and Conservation Act, as amended (EPCA or Act),
requires the Department of Energy (DOE or Department) to consider
amending the energy conservation standards for certain major household
appliances. In 1992, the Department initiated engineering and LCC
studies for central air conditioners and heat pumps based on use of
computer simulation models. An ad hoc working group was formed to
advise the Department and to provide engineering and test data to use
with the computer models. The working group, which included
representatives from central air conditioner and heat pump
manufacturers, the Air Conditioning & Refrigeration Institute (ARI),
Lawrence Berkeley National Laboratory (LBNL), and Oak Ridge National
Laboratory (ORNL), also provided production cost data for establishing
the cost-effectiveness of the various design options selected for
study.
On September 8, 1993, the Department published an ANOPR (58 FR
47326 ) which discussed the number of product classes and design
options, the computer simulation models, and the methodologies which
the Department intended to use in its analysis of increased energy
efficiency standards for central air conditioners and heat pumps. After
the ANOPR was issued, the Department continued its analysis of LCCs,
payback periods, and preliminary NES which were shared with
representatives from the air-conditioning industry.
In 1995, the Department abandoned the approach of using computer
simulation models as a result of concerns expressed by the industry.
The concerns included: the cost/performance relations derived from the
computer simulations were not consistent with the experience of the
industry; the assumptions and procedures were flawed; and the industry
expressed doubts over the Department's experience with selection of
appropriate design options.
In October, 1995, a moratorium on proposing, issuing, or
prescribing energy conservation standards took effect pertaining to
standards for central air conditioners and heat pumps, and the dialogue
between the air-conditioning industry and the Department, on the
analysis performed, was suspended.
2. Process Improvement
During consideration of the fiscal year 1996 appropriations, there
was considerable debate about the efficacy of the standards program.
The Department of the Interior and Related Agencies Appropriations Act
for Fiscal Year 1996 included the aforementioned moratorium on
proposing or issuing energy conservation appliance standards for the
remainder of Fiscal Year 1996. See Pub. L. 104-134. Congress advised
DOE to correct the standards-setting process and to bring together
stakeholders (such as manufacturers and environmentalists) for
assistance. In September 1995, the Department announced a formal effort
to consider further improvements to the process used to develop
appliance efficiency standards, calling on manufacturers, energy
efficiency groups, trade association, state agencies, utilities and
other interested parties to provide input to guide the Department. On
July 15, 1996, the Department published a Final Rule: Procedures for
Consideration of New or Revised Energy Conservation Standards for
Consumer Products (hereinafter referred to as the Process Rule). 61 FR
36974.
The Process Rule outlines the procedural improvements identified by
the interested parties. The process improvement effort included a
review of the: (1) Economic models, such as the Manufacturer Analysis
Model and Residential Energy Model; (2) analytical tools, such as the
use of a Monte Carlo sampling methodology; and (3)
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prioritization of future rules. The Process Rule requires the
evaluation of uncertainty and variability by doing scenario or
probability analysis (as detailed in the Process Rule, 10 CFR part 430,
subpart C, appendix A sections 1(f), 4(d)(2), and 10(f)(1)). In
addition, an Advisory Committee on Appliance Energy Efficiency
Standards, consisting of a representative group of these interested
parties, was established to make recommendations to the Secretary
regarding the implementation of the Process Rule.
The Process Rule is applicable in this rulemaking to develop new
central air conditioner and heat pump standards. In this Supplemental
ANOPR, the Department is presenting the framework by which it will
develop the standards. The framework reflects improvements and steps
detailed in the Process Rule. The rulemaking process is dynamic. If
timely new data, models or tools that enhance the development of
standards become available, they will be incorporated into the
rulemaking. For example the Advisory Committee has made several
recommendations and the Department has developed new models which are
discussed in this Supplemental ANOPR.
The Department held a workshop on June 30, 1998 to discuss the
analytical framework that was being proposed for conducting the central
air conditioner and heat pump rulemaking. The analytical framework
presented at the workshop described the different analyses (e.g., the
LCC, payback and national impact analyses) to be conducted (See Table
1), the methods proposed for conducting them, and the relationship
among the various analyses.
Table 1.--Central Air Conditioner and Heat Pump Analyses Under Process Rule
----------------------------------------------------------------------------------------------------------------
ANOPR NOPR Final Rule
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Screening Analysis................... Revised Pre-ANOPR Analyses Revise Analyses (LCC and National Impacts
(LCC and National Impacts Analyses).
Analyses).
Engineering Analysis................. Consumer Sub-group Analysis.
LCC Analysis......................... Industry Cash Flow Analysis
(GRIM).
Preliminary National Impacts Analysis Manufacturer Impact Analysis.
Utility Impact Analysis.
Environmental Analysis.
----------------------------------------------------------------------------------------------------------------
A number of concerns were raised at the framework workshop relating
to the application of the Process Rule to the central air conditioner
and heat pump rulemaking, with particular emphasis on (1) the
appropriate approaches for conducting the Engineering Analysis, (2) how
to validate manufacturer cost figures submitted by ARI, (3) methods for
developing consumer equipment price data, and (4) how non-regulatory
issues, e.g., the phase-out of hydro-fluoro-chloro-carbon (HCFC)
refrigerants might affect the effective date of any new standards.
In response to the concerns and comments of interested parties at
the Framework Workshop, the Department decided to perform the
Engineering Analysis based on the efficiency-level approach rather than
the design option approach, using cost data submitted by manufacturers
in aggregate via their trade association, ARI. The Department also
decided to utilize a reverse engineering approach as a ``stand alone''
analysis for developing manufacturer costs and validating the ARI-
provided manufacturer's cost data. Both approaches are discussed in
detail in the discussion of the Engineering Analysis (II C.).
As part of the information gathering and sharing process, the
Department and its contractors met several times with members of the
ARI Unitary Equipment Regulatory Committee, presenting the preliminary
manufacturer costs developed through the reverse engineering approach
and demonstrating the LCC spreadsheet model. During this time period,
ARI submitted relative production cost data for the four different
product classes of central air conditioners and heat pumps (split
system and single package for both air conditioners and heat pumps) for
3-ton capacity systems at various efficiency levels. Efficiency levels
are defined differently for air conditioners and for heat pumps. Air
conditioner efficiency is defined by the descriptor, Seasonal Energy
Efficiency Rating (SEER). Heat pump efficiency is defined by the
descriptor, Heating Season Performance Factor (HSPF) while operating
during the heating season and by SEER while operating during the
cooling season. The cooling season efficiencies provided by ARI ranged
from 11 to 14 SEER. The individual manufacturers provided their costs,
which were normalized to 10 SEER equipment costs, to ARI. ARI
aggregated the individual manufacturers' costs and provided the
Department with minimum, maximum and shipment-weighted mean values.
As will be discussed in the Engineering Analysis, the ARI-provided
and reverse engineering manufacturer costs overlap considerably,
especially at the lower efficiency levels in the split air conditioning
class and in the middle efficiency levels of the split heat pump class.
For the most part, the range between ARI's minimum and mean
manufacturer costs completely encompasses the reverse engineering
costs. This agreement is encouraging given the levels of uncertainty
and variability involved in estimating representative manufacturer
costs under different efficiency baselines across a diverse industry.
These areas of convergence provide an excellent indication of the most
likely costs of producing equipment utilizing today's technology under
new standard levels.
Although the two sets of manufacturer costs do overlap, they
disagree in some respects. In particular, there are significant
differences in the breadth of the manufacturer cost distributions at
each efficiency level. The Department assumes that vigorous competition
in the market for minimum-efficiency equipment will compel
manufacturers to meet new standards at similar incremental manufacturer
costs, and that the market cannot sustain as broad a range of costs as
ARI's results may imply. Furthermore, we cannot replicate ARI's maximum
manufacturer costs without altering our underlying assumptions beyond
what we currently consider justified.
The Department and ARI have worked diligently to identify possible
sources of those discrepancies. The Department sincerely appreciates
ARI's and its members' dedicated participation in the Engineering
Analysis. Their relative manufacturer costs provide a solid
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foundation for further analysis, and their frequent review of and input
to our validation effort is a valuable addition to our understanding of
the production and design issues associated with meeting higher
standards. The Department will work with ARI to understand the
remaining differences between our two sets of manufacturer costs.
With regard to the LCC, payback, and preliminary national impact
analyses, three new spreadsheet tools were developed for this
rulemaking in an effort to meet the objectives of the Process Rule. The
first spreadsheet calculates LCC and payback. The second one calculates
impacts of standards at various levels on shipments. The third
calculates the NES and national net present values (NPV) at various
standard levels. These spreadsheets and the results of the preliminary
analysis were posted on the Department's web site on August 24, 1999.
The preliminary results posted on the web consisted of two sets of
data: one set based on the manufacturer costs submitted by ARI and the
other set based on manufacturer costs developed through reverse
engineering. The Department suggested that any errors in the web site
materials be immediately brought to our attention for correction, and
that any other comments be submitted during the 75 day period following
publication of this Supplemental ANOPR.
The Department has reviewed the recommendations made by the
Advisory Committee on Appliance Energy Efficiency Standards on April
21, 1998. (Advisory Committee, No. 96) These recommendations relate to
using the full range of consumer marginal energy rates (CMER) in the
LCC Analysis (replacing the use of national average energy prices),
defining a range of energy price futures for each fuel used in the
economic analyses and defining a range of primary energy conversion
factors and associated emission reductions, based on the generation
displaced by energy efficiency standards for each rulemaking. The
Department has incorporated the use of consumer marginal energy rates
and a range of future energy prices for the analysis that was conducted
for this Supplemental ANOPR. The Department plans to incorporate the
recommendations on energy conversion factors in future analyses for the
Notice of Proposed Rulemaking (NOPR).
Today's Supplemental ANOPR pertains to central air conditioners and
heat pumps and utilizes the framework described in Section II. Both
written and verbal comments from the June 30, 1998 Framework Workshop
are being addressed in this document. The commentor's name and
organization are shown in parentheses after each comment. Written
comments are further identified by a number assigned to each set of
written comments received during the commentary period. Verbal comments
are further identified by the page number in the workshop transcript.
Written comments and the Workshop transcript are viewable at the
Department's Freedom of Information Reading Room described previously.
3. Test Procedure
Section 7(b) of the Process Rule states that necessary
modifications to test procedures concerning efficiency standards will
be identified and proposed before issuance of an ANOPR. The residential
central air conditioner and heat pump test procedure is currently being
revised to improve its organization and ease of use, with a proposed
rule expected in November, 1999. This revision of the test procedure is
not expected to alter the measured efficiencies as determined under the
existing test procedure. Therefore, the revised test procedure would
not affect development of revised efficiency standards. For these
reasons, revisions to the test procedure are not a ``necessary
modification'' as that term is used in the Process Rule, but rather a
routine update, and hence need not be proposed before issuance of the
proposed rule for these standards.
II. Central Air Conditioner and Heat Pump Analyses
This section includes a general introduction to each analysis
section and provides a discussion of issues relevant to energy
conservation standards for central air conditioners and heat pumps.
The Department received a number of general comments from Energy
Market & Policy Analysis (EMPA) regarding the analysis conducted for
the rulemaking (EMPA, # 3). Some of these concern the rulemaking
procedure, while others refer to the analytic methods, and are as
follows: the methodology for evaluating standards is extremely complex
and increasingly unrealistic; approaches, models, assumptions, data,
and data sources need to be more detailed and should to be put out for
public comment before issuance of the ANOPR; and inadequate
consideration is given to the impact of standards on ``real consumers''
as EMPA believes that groups on the DOE Advisory Committee do not
represent and protect the interests of ``real consumers.''
The Department appreciates the concerns expressed previously. The
methods and approaches used for the analyses conducted for this
Supplemental ANOPR are well described and have been released on the
Department's web site prior to the issuance of this notice. Any
questions or comments as to how to clarify the methodologies used in
this rulemaking are always welcome and appreciated.
A. Preliminary Market and Technology Assessment
The preliminary market and technology assessment characterizes the
relevant product markets and existing technology options including
prototype designs.
1. Market Assessment
a. General
When initiating a standards rulemaking, the Department develops
information on the present and past industry structure and market
characteristics of the product(s) concerned. This activity consists of
both quantitative and qualitative efforts to assess the industry and
products based on publicly available information. Issues to be
addressed include: (1) Manufacturer market share and characteristics;
(2) trends in the number of firms; (3) the financial situation of
manufacturers; (4) existing non-regulatory efficiency improvement
initiatives; and (5) trends in product characteristics and retail
markets. The information collected serves as resource material to be
used throughout the rulemaking. For instance, historical product
shipments and prices are used to help predict future prices and
shipments. Market structure data are particularly useful in conducting
the competitive impacts analysis.
b. Product Specific
The Department reviewed existing literature and interviewed
manufacturers to get an overall picture of the residential central air-
conditioning market in the United States. Industry publications and
trade journals, government agencies, and trade organizations provided
the bulk of the information, including: (1) Manufacturer market share;
(2) shipments by capacity and efficiency level; (3) price distribution;
(4) market saturation; and (5) distribution trends. The information
described is discussed in the sections where it is used in the
analysis.
Edison Electric Institute (EEI) commented that contractors should
be interviewed when market assessments are being developed (EEI, # 2)
while the
[[Page 66310]]
Oregon Office of Energy (OOE) requested the Department to gather
information on trends in product characteristics and non-regulatory
efficiency improvement initiatives, and to interview manufacturers of
components (compressors, motor/fan assemblies, heat exchangers) on
initiatives to improve system efficiency. (OOE, # 7) The Department
relied predominantly upon literature searches and input from equipment
manufacturers while developing its market assessment, but also
interviewed national contracting organizations, independent contractors
and component suppliers. Of course, this market assessment is
preliminary, and any additional comments will be taken into
consideration when the assessment is revised.
2. Technology Assessment
a. General
Information relating to existing and past technology options and
prototype designs are typically used as inputs to determine what
technologies manufacturers utilize to attain higher energy efficiency
levels. In consultation with interested parties, the Department
develops a list of technologies that can and should be considered.
Initially, the technologies encompass all those considered to be
technologically feasible and serve to establish the maximum
technologically feasible design.
b. Product Specific
The Department based its list of technically feasible design
options on design options included in a previous ANOPR (58 FR 47326,
September 8, 1993). The Department then updated the list through
consultation with manufacturers of components and systems, trade
publications, and technical papers. Since many options for improving
product efficiency are available in existing equipment, product
literature and direct examination provided additional information.
Further descriptions of the most current technologies are provided in
the engineering section of the Preliminary TSD.
OOE asserted that all appropriate component and system technologies
must be considered in the technology assessment, and that it should
include microchannel heat exchangers and electrohydrodynamic
enhancement technologies (OOE, # 7). Additional technologies were
considered as set forth in the Technology Screening Analysis (section
II.B.3) including such emerging technologies as microchannel heat
exchangers, modulating compressors, and advanced variable speed motors
and controls. Electrohydrodynamic enhancement technologies were not
considered as they have yet to be publicly demonstrated in prototypical
central air conditioner and heat pump designs.
3. Preliminary Baseline Shipments Forecast
a. General
The Department develops a preliminary baseline forecast of product
shipments that assumes no new standards. This is an initial step in an
iterative process. Subsequently, a more comprehensive baseline
shipments forecast is prepared using a shipments model, superceding the
preliminary forecast.
The baseline shipments forecast is used as an input to the National
Benefits Analysis. To perform the National Benefits Analysis, a
forecast of shipment-weighted product efficiencies is prepared to the
year 2030. To assess the average impact on the affected consumer, a
forecast of product shipments by efficiency level was prepared for the
year a new standard would come into effect.
b. Product Specific
The Department prepared a baseline shipments forecast for central
air conditioners and heat pumps. Data on historical product shipments
guided preparation of the preliminary baseline shipments forecast.
The Oregon Office of Energy (OOE) pointed out that non-regulatory
energy efficiency programs are on the wane, and that if these programs
are to be considered in shipment forecasting, it must be quantifiably
demonstrated how they will transform the market (OOE, #7). Information
from parties involved in market-based initiatives for increasing the
sales of high-efficiency models was reviewed, but provided no
quantifiable measure of how these programs impact product efficiencies
on a national basis. However, because the baseline forecast assumes an
efficiency distribution of 10.7 SEER, based on current sales, the
impact of market-based initiatives is implicit in the baseline
forecast.
OOE also noted that since central air conditioning is not an
essential appliance for most areas of the country, central air
conditioning purchase price elasticities will likely be different than
those used for forecasting shipments in other product rulemakings (OOE,
#7). Since the shipments model used in this rulemaking was prepared
specifically for central air conditioners and heat pumps, the
Department believes this concern is addressed. The shipments model is
further described in the Preliminary National Impacts Analysis
discussion in section E.1.b.ii.
B. Screening Analysis
The Screening Analysis reviews various technologies with regard to
whether they: (a) Are technologically feasible; (b) are impracticable
to manufacture, install and service; (c) have an adverse impact on
product utility or product availability; and (d) have adverse impacts
on health and safety. The subsequent Engineering Analysis does not
consider or incorporate technologies that do not pass these tests,
regardless of whether the Engineering Analysis takes a Design Option
approach or an Efficiency-level approach. Technologies that pass the
Screening Analysis tests may be considered further to determine their
potential cost and efficiency impacts. The Screening Analysis also
identifies possible product classes and baseline equipment to serve as
a basis for further analysis.
1. Product Classes
a. General
Product types are divided into classes using the following
criteria: (a) The type of energy used; (b) capacity; and (c)
performance-related features that affect consumer utility or
efficiency. Different energy efficiency standards are applied to
different product classes. In general, classes are defined using
information obtained in discussions with appliance manufacturers, trade
associations, and other interested parties.
b. Product Specific
As prescribed by the National Appliance Energy Conservation Act
(NAECA), central air conditioners and heat pumps are each categorized
into split and single package systems, giving four product classes. The
analysis performed to date includes only products in these four product
classes at a nominal 3 ton capacity. However, there may be
justification for establishing additional classes including product
types such as:
Through-the-wall condensing units,
Ductless split systems,
High-velocity space-conditioning systems, and
Vertical packaged, wall mounted.
The Department is also considering establishing new classes defined
by the cooling or heating capacity of the equipment.
OOE felt that the addition of more classes may be reasonable. For
example, mini-splits and combined space/water
[[Page 66311]]
heating systems might be considered as separate classes based on their
characteristics and configuration constraints (OOE, #7).
EEI commented that the product classes be expanded to include gas-
fired air-conditioning equipment. Gas-fired equipment would then not be
included as a design option, but as an additional product class for
which baseline models must be developed. (EEI, # 2) Although the
Department appreciates EEI's comments, the NAECA definition of central
air conditioners subsumes only certain types of electric driven
systems. This rulemaking addresses only products covered by that
definition, and thus, no consideration will be given here to developing
standards for fuel driven technologies.
With regard to the additional product classes listed in this
section, the Department is seeking input on whether they need to be
established.
2. Baseline Equipment
a. General
The Department defines baseline equipment for each product class as
the starting point for analyzing energy efficiency improvements.
Baseline equipment are models with the minimum allowable energy
efficiency specified by the NAECA. Such baseline equipment are
typically ``low-end'' units that contain no premium features, e.g.,
noise reduction or appearance features.
b. Product Specific
Efficiency is the most important statistic required to establish
the baseline model. Current minimum efficiency standards for split and
single package system central air conditioners and central air
conditioning heat pumps are 10.0 and 9.7 SEER, respectively. The
current minima for the heating performance of split and single package
central air conditioning heat pump systems are 6.8 and 6.6 HSPF,
respectively. The Department used the split system minimum efficiency
standards as the baseline efficiency for each of the above classes. If
additional classes are created, the Department will apply the
appropriate existing standard as the baseline efficiency for that
class.
OOE agreed with the Department's intent to use the efficiency of
products that just meet the current minimum NAECA requirements as the
baseline efficiency. (OOE, #7)
3. Technology Screening
a. General
An initial list of efficiency enhancement options is developed from
the technologies identified in the technology assessment. Then the
Department, in consultation with interested parties, reviews the list
to determine if they are practicable to manufacture, install and
service, would adversely affect product utility or product
availability, or would have adverse impacts on health and safety.
Efficiency enhancement options not eliminated in the screening process
are considered further in the Engineering Analysis.
b. Product Specific
Compiling a list of efficiency enhancement options provided an
understanding of the technologies available to manufacturers to improve
equipment efficiency. This understanding also helped the Department
estimate maximum technologically feasible efficiency levels. For split
air conditioners, the Department believes, based on a preliminary
analysis, that 20 SEER is the highest efficiency level attainable by
2006 on a commercially practicable basis using design and technology
options that pass the screening criteria. These include the following:
enhanced and oversized heat transfer surfaces; variable or multispeed
or variable capacity compressors; high efficiency compressors;
electrically-commutated, variable-speed fan or blower motors, and
thermostatic or electronic expansion valves. We assumed that the
efficiency of compressors, motors, and heat transfer surfaces would
improve slightly prior to the effective date of any new rule. The 20
SEER level does not depend on any emerging technologies, because the
Department believes that, although those technologies could reduce the
cost of the equipment in the SEER 13 to SEER 17 range compared to
established technologies, the emerging technologies will not advance
the maximum attainable efficiency level.
The analysis of manufacturing costs and prices was based only on
technologies and designs available in mass produced products as of
1998. The Department considered the potential cost impact of emerging
technologies in a separate analysis described in the Preliminary TSD.
The emerging technologies that pass the screening criteria include:
Microchannel heat exchangers
Advanced compressors
Variable speed motor controls
The American Council for an Energy Efficient Economy (ACEEE), OOE,
Modine Manufacturing (Modine), and York International (York) all
provided comments pertaining to emerging technologies. Both ACEEE and
OOE suggested that all advanced or emerging technologies be considered
(ACEEE, #5; Steve Nadel, ACEEE, Transcript, pp 80-81; OOE, #7) . ACEEE
identified improved compressors and microchannel heat exchangers. ACEEE
also stated that emerging technologies could be analyzed in the context
of a reverse engineering analysis. Modine stated that PF (microchannel)
heat exchangers are a viable technology for improving equipment
efficiency, but their acceptance should be driven by market needs
rather than through a desire to push the technology into the market
(Modine, #1). Bristol Compressors (Bristol) is now bringing to market
the Twin-Single (TS) compressor, a reciprocating compressor that
reduces system capacity by de-activating one or more pistons under
part-load operating conditions. Bristol states that this technology can
increase central air conditioner and heat pump efficiency from either
10 to 12 SEER or from 12 to 14 SEER. With a variable-speed indoor
blower, the TS can increase system efficiency from 10 to 14 SEER (York,
#4).
In contrast, an industry representative contended that emerging
technologies would already be in the marketplace if they were feasible
and that, in the context of conducting an Engineering Analysis based on
the use of the efficiency-level approach, emerging technologies should
not be considered until they are shown to radically change the shape of
the industry cost curve. (Jim Crawford, The Trane Company (Trane),
Transcript, pp 81,87) ARI stated that in developing an aggregate
industry cost curve, emerging technologies may or may not be included
depending on whether manufacturers submitting data include them in
their cost estimates (Ted Leland, ARI, Transcript, pp 85).
The Department has performed a preliminary assessment of the
potential impact of these technologies on the manufacturing costs of
air-conditioning equipment and is seeking comment on the following:
Whether these emerging technologies do in fact pass the screening
criteria; the potential impact of these technologies on manufacturing
cost, operating cost, and price; whether additional emerging
technologies should be considered; and whether the maximum
technologically feasible level is commercially practical.
The Department notes that it is not considering fuel-driven
technologies, such as gas-fired engine driven heat pumps, absorption
heat pumps, and Stirling refrigeration cycles, as design options for
central air conditioners and heat pumps. NAECA defines a central air
conditioner and heat pump, in part,
[[Page 66312]]
as being ``powered by single phase electric current.'' This rulemaking
concerns only products that meet the NAECA definition. Thus, fuel-
driven technologies are precluded from consideration here.
C. Engineering Analysis
The purpose of the Engineering Analysis is to estimate the energy
savings potential from increased equipment efficiency levels and the
costs of achieving those levels, compared to the baseline equipment.
The increased efficiency levels are associated with increased
production costs. The efficiency/cost relations developed in the
Engineering Analysis are combined with end-user costs in the LCC
Analysis.
1. Energy Savings Potential and Production Costs
a. General
The Engineering Analysis estimates the energy savings potential of
the individual or combinations of design options not eliminated in the
previous Screening Analysis. The Department, in consultation with
stakeholders, uses the most appropriate means available to determine
energy consumption, including an overall system approach or engineering
modeling. Ranges and uncertainties in performance are established.
The Engineering Analysis involves adding individual or combinations
of design options to the baseline equipment. A cost-efficiency
relationship is developed to show the manufacturer cost of achieving
increased efficiency. The efficiency levels corresponding to various
design option combinations are determined from manufacturer data
submittals and from DOE engineering calculations.
EPCA requires that, any new or amended standard, ``shall be
designed to achieve the maximum improvement in energy efficiency that
the Secretary determines is technologically feasible and economically
justified.'' EPCA, section 325(l)(2)(A), 42 U.S.C. 6295(l)(2)(A). An
essential role of the Engineering Analysis consists of identifying the
maximum technologically feasible level. The maximum technologically
feasible level is one that can be reached by the addition of efficiency
improvements and/or design options, both commercially feasible or in
working prototypes, to the baseline equipment. The Department believes
that the design options must have been physically demonstrated in at
least a prototype form to be considered technologically feasible.
Three methodologies can be used to generate the manufacturing costs
needed for the Engineering Analysis. These methods include: (1) The
design-option approach, reporting the incremental costs of adding
specific design options to a baseline model; (2) the efficiency-level
approach, reporting relative costs of achieving energy efficiency
improvements; and/or (3) the reverse engineering or cost-assessment
approach which requires a ``bottoms-up'' manufacturing cost assessment
based on a detailed bill of materials for models that operate at
particular efficiency levels. The Department considers public comments
in determining the best approach for a rulemaking.
If the efficiency-level approach is used, the Department will
select appropriate efficiency levels for data collection on the basis
of: (1) Energy savings potential identified from engineering models;
(2) observation of existing products on the market; and/or (3)
information obtained for the technology assessment. Stakeholders will
be consulted on the efficiency-level selection.
The use of a design-option approach provides useful information
such as the identification of potential technological paths
manufacturers could use to achieve increased product energy efficiency.
It also allows the use of engineering models to simulate the energy
consumption of different design configurations under various user
profiles and applications. However, the Department recognizes that the
manufacturer cost information derived in the design-option approach
does not reflect the variability in design strategies and cost
structures that can exist among manufacturers. Therefore, the
Department may derive additional manufacturing cost estimates from
other approaches developed in consultation with interested parties.
The reverse engineering or cost-assessment approach can be used to
supplement the efficiency-level or design option approaches under
special circumstances when data is not publically available for
proprietary reasons, the product is a prototype and/or the data is not
provided by the manufacturers.
b. Product Specific
The Department, in consultation with stakeholders, has used both
overall efficiency level and reverse engineering approaches. The
efficiency-level analysis relies upon manufacturer cost submittals from
ARI while the reverse engineering analysis relies upon manufacturer
costs developed by Arthur D. Little, Inc. (ADL) for the Department. The
design options selected in the Screening Analysis helped to establish
potential efficiency improvements.
Manufacturing cost estimates under the efficiency-level approach
were submitted by individual manufacturers to ARI. For purposes of
ensuring manufacturer confidentiality, ARI submitted to the Department
minimum, maximum, and shipment-weighted averages of incremental
manufacturer cost increases associated with various efficiency levels.
In the case of the reverse engineering approach, ADL derived
manufacturing cost estimates from detailed incremental cost data
enabling them to establish costs for labor, purchased parts and
material, shipping/packaging, and investment. Both sets of manufacturer
costs were input into the Engineering Analysis and cost-efficiency
relationships were developed to show the manufacturing costs of
achieving various levels of increased efficiency.
As discussed earlier in the section on Process Improvement,
attempts were made to reconcile differences between the ARI and the
preliminary reverse engineering production cost data. Feedback from the
industry resulted in revising the reverse engineering production costs
of such components as outdoor cabinet (labor and materials), indoor
coil (materials) and refrigerant materials. Packaging and shipping
costs were also revised. The Department is continuing consultations
with manufacturer representatives regarding other industry suggested
issues, including manufacturing production volume, copper and aluminum
raw material costs, compressor costs, indoor and outdoor coil costs,
and freight costs. For more detail on how the ARI and the reverse
engineering costs were developed, and our revisions to the reverse
engineering costs, please refer to the Preliminary TSD. As noted
earlier, these revisions helped to reconcile some of the differences
between the ARI production costs and the reverse engineering production
costs, but remaining differences between the two sets of manufacturer
cost require further examination.
i. Efficiency-Level Approach
The efficiency-level approach establishes the relationship between
manufacturer cost and increased efficiency at predetermined efficiency
levels. It has the distinct advantage of being simple and straight
forward. Manufacturers typically provide incremental manufacturer cost
data for
[[Page 66313]]
incremental increases in efficiency. Cost-efficiency curves can be
easily constructed to clearly identify at what point manufacturers are
incurring significant costs to raise efficiency. Additionally, the
efficiency-level approach allows manufacturers the ability to supply
detailed cost data without revealing their unique design strategies for
achieving increased efficiency levels.
But the simplicity of the efficiency-level approach is also its
primary drawback. Namely, since technological details are not provided,
it is extremely difficult to verify whether the costs provided for each
specific efficiency level are truly representative of the costs for
that level. In addition, prototypical designs become difficult to
evaluate and maximum technologically feasible designs are then
difficult to ascertain. As a result, some other type of analysis is
likely needed in order to verify the accuracy of the costs supplied
through the efficiency-level approach.
In reply to the Department's request to stakeholders at the 1998
Framework Workshop regarding the most appropriate approach which should
be pursued for the Engineering Analysis, some industry members stated
their support for the efficiency-level approach (Ted Leland, ARI; David
Lewis, Lennox International Inc (Lennox), Transcript, pp 55-56, 61,
76). More specifically, these industry members stated their intention
to provide costs under the efficiency-level approach as one cost-
efficiency curve that would represent an aggregate of the entire
industry, i.e., a smooth curve relating the relative manufacturer cost
increases associated with increased efficiency. Industry indicated that
the curve would represent the 90th percentile, i.e., the cost
efficiency level at which 90% of manufacturers would be able to produce
product.
ACEEE and the OOE stated they would be willing to accept the
efficiency-level approach only if certain conditions were met (ACEEE,
#5, OOE, #7; Steven Nadel, ACEEE, Transcript, pp 65-67; Charlie
Stephens, OOE, Transcript, pp 65-67). For example, in addition to
providing costs at the 90th percentile, costs at multiple percentiles
should be reported. Having the full distribution of costs allows for a
more meaningful probability analysis to be conducted. With regard to
heat pumps, costs should be collected for achieving different HSPF
levels in addition to providing costs at different SEER levels. ACEEE
and OOE stated that verification of the costs submitted is extremely
important and they suggest that DOE staff members or consultants be
permitted to inspect raw data in order to ascertain its reasonableness.
OOE suggested that a reverse engineering or design option approach be
used to verify the cost data, although they prefer the design option
approach. ACEEE also contended that a design approach could be used to
verify cost data. ACEEE stated that it is more important to verify
costs submitted for high-efficiency equipment (14 to 15 SEER) as
current market prices do not reflect mature market costs. Both the
Consortium for Energy Efficiency and the Pacific Gas and Electric
Company (PG&E) supported ACEEE's conditions for adopting the
efficiency-level approach (CEE, #6; PG&E, #8). In addition, PG&E
believed that the cost of efficiency upgrades for heat pumps will be
similar to air conditioners since their components are nearly identical
(PG&E, #8).
On the issue of cost verification, one industry representative
contended that if industry provided disaggregated cost data it would
allow for the determination of the sources of the data and, thus,
result in violation of anti-trust laws. (Jim Crawford, Trane,
Transcript, pp 70-72) In any case, he stated that if the reverse
engineering approach were used and it validated the aggregated industry
cost-efficiency curve the issue of cost verification would be a moot
point.
The Department selected two approaches, one of which was the
efficiency-level approach, for conducting the Engineering Analysis.
Specific efficiency levels were selected by the Department based on
consultations with stakeholders. In the case of central air
conditioners, efficiency levels were based upon SEER. Efficiency levels
for heat pumps were based upon both the cooling season SEER and the
heating season HSPF efficiencies.
ARI collected data from individual manufacturers and, rather than
providing only costs at the 90th percentile, submitted minimum,
maximum, and shipment-weighted mean incremental manufacturer costs for
five distinct efficiency levels (11, 12, 13, 14, and 15 SEER). ARI also
provided incremental manufacturer costs for heat pumps for the same
five SEER levels. Since heat pumps are also rated for their heating
performance using the HSPF efficiency descriptor, the Department
developed a simple relationship between the two efficiency descriptors
for purposes of setting an HSPF standard in addition to an SEER
standard. The Department assumed the following set of heating seasonal
performance factors corresponding to the above five SEER levels: 7.1,
7.4, 7.7, 8.0, and 8.2 HSPF).
Tables 2 to 5 show the incremental manufacturer costs, also called
manufacturer cost multipliers, which ARI submitted for the four primary
product classes for systems with cooling capacities of approximately 3
tons (36,000 Btu/hr). The manufacturer cost multipliers are used
together with the baseline manufacturer cost (which will be presented
in Section II.C.2.b.) to determine the manufacturer costs for each
efficiency level. For example, the mean manufacturer cost multiplier
for an 11 SEER split system air conditioners from Table 2 is 1.16 and
the baseline manufacturer cost for a split system air conditioner is
$454. Thus, the mean manufacturer cost for an 11 SEER split system air
conditioner is the product of the baseline manufacturing cost ($454)
and the cost multiplier (1.16), or $527. While the manufacturer cost
multipliers in Tables 2 to 5 included low and high values as well as
mean values, because the probability distribution for the cost data at
a given standard level are unknown, only the mean values were
subsequently used in the LCC Analysis (section II.D).
Table 2.--Split System Air Conditioners--ARI Manufacturer Cost
Multipliers
------------------------------------------------------------------------
SEER Low Mean High
------------------------------------------------------------------------
10........................................... ....... 1.00 .......
11........................................... 1.03 1.16 1.30
12........................................... 1.09 1.36 1.55
13........................................... 1.30 1.63 1.90
14........................................... 1.60 2.03 3.00
15........................................... 1.81 2.40 3.50
------------------------------------------------------------------------
Table 3.--Split System Heat Pumps--ARI Manufacturer Cost Multipliers
------------------------------------------------------------------------
SEER/HSPF Low Mean High
------------------------------------------------------------------------
10/6.8.......................................... ...... 1.00 ......
11/7.1.......................................... 1.05 1.10 1.15
12/7.4.......................................... 1.11 1.24 1.35
13/7.7.......................................... 1.17 1.44 1.66
14/8.0.......................................... 1.30 1.64 1.88
15/8.2.......................................... 1.75 2.09 2.52
------------------------------------------------------------------------
Table 4.--Single Package Air Conditioners--ARI Manufacturer Cost
Multipliers
------------------------------------------------------------------------
SEER Low Mean High
------------------------------------------------------------------------
10........................................... ....... 1.00 .......
11........................................... 1.03 1.19 1.27
12........................................... 1.15 1.30 1.40
13........................................... 1.40 1.63 1.75
14........................................... 1.59 1.87 2.00
[[Page 66314]]
15........................................... 1.89 2.23 2.92
------------------------------------------------------------------------
Table 5.--Single Package Heat Pumps--ARI Manufacturer Cost Multipliers
------------------------------------------------------------------------
SEER/HSPF Low Mean High
------------------------------------------------------------------------
10/6.8.......................................... ...... 1.00 ......
11/7.1.......................................... 1.06 1.14 1.25
12/7.4.......................................... 1.06 1.28 1.50
13/7.7.......................................... 1.45 1.60 1.90
14/8.0.......................................... 1.65 1.75 2.30
15/8.2.......................................... 1.93 2.13 2.47
------------------------------------------------------------------------
In response to EEI's comment that the Engineering Analysis should
include the impact of any standard on the EER rating of the equipment
(EEI, #2), the Department plans on conducting a Utility Impact Analysis
for the Notice of Proposed Rulemaking (NOPR). The Utility Impact
Analysis will capture the peak power impacts of an increased SEER
standard, which EEI is alluding to in their comment regarding the EER.
ii. Reverse Engineering Analysis
As mentioned in the previous section, a reverse engineering
approach was conducted in parallel with the efficiency-level approach
to validate the ARI production cost data. The use of a component-based
technology-costing (reverse engineering) approach provides useful
information including the identification of potential technological
paths manufacturers could use to achieve increased product energy
efficiency. Under this type of analysis, actual equipment on the market
is physically analyzed, i.e., dismantled, component-by-component to
determine what technologies and designs manufacturers employ to
increase efficiency. Independent costing methods or manufacturer and
component supplier data are then used to estimate the costs of the
components. This approach has the distinct advantage of using ``real''
market equipment to establish the technologies which manufacturers use
as the basis for estimating the cost to reach higher efficiencies.
The primary disadvantage of reverse engineering is the time and
effort required to analyze ``real'' equipment. Several models from a
diverse range of manufacturers may have to be assessed in order to
ensure that an accurate representation of technological paths for
increasing efficiency are identified. In addition, since only equipment
in the market is analyzed, prototypical designs may not be captured by
the analysis, thus making it difficult to establish maximum
technologically feasible designs.
The industry contends that a reverse engineering approach could be
used to verify the cost data submitted through the efficiency-level
approach but DOE must first define the acceptable level of variability
between the costs that are developed through each approach. (Jim
Crawford, Trane; David Lewis, Lennox, pp 110-113) Industry also
maintained that there is wide variation in production costs between
manufacturers due to the levels of services that are provided with the
purchase of the equipment. OOE stated that reverse engineering could be
used to validate the efficiency approach (OOE, #7) while ACEEE stated
that reverse engineering has the benefit of analyzing advanced
technologies. (Steven Nadel, ACEEE, pp 80-81)
The Department carried out the reverse engineering approach to
validate the cost estimates provided by ARI from the efficiency-level
approach. The manufacturer costs of 71 equipment models at eight
efficiency levels were estimated. Three 3-ton models were torn down:
(1) A 10 SEER split system cooling-only condenser, (2) a 10 SEER
packaged heat pump, and (3) a 12 SEER split system heat pump condenser.
Manufacturer submissions, catalog data, and the ARI Product Attributes
Database provided design information on the other 68 models. For split
system air conditioners, cost estimates were developed for whole-number
efficiency levels ranging from 10 to 17 SEER. For split system heat
pumps, cost estimates were developed for whole-number efficiency levels
ranging from 10 to 16 SEER. The heating efficiencies corresponding to
each of the whole-number SEER levels were: 6.8 HSPF for 10 SEER, 7.1
HSPF for 11 SEER, 7.4 for 12, 7.7 for 13, 8.0 for 14, 8.2 for 15, and
8.4 for 16. A limited set of models were analyzed for single package
systems. For single package air conditioners cost estimates were
developed for 10, 12, and 13 SEER efficiency levels while for single
package heat pumps cost estimates were developed for 10 SEER/6.8 HSPF
and 12 SEER/7.4 HSPF efficiency levels.
Tables 6 to 9 show the manufacturer cost multipliers developed by
reverse engineering for the four primary product classes. Probability
distributions rather than single point-values were used in the LCC
analysis. The low and high values shown in the following represent the
10th and 90th percentiles, respectively, of the distributions.
Table 6.--Split System Air Conditioners--Reverse Engineering
Manufacturer Cost Multipliers
------------------------------------------------------------------------
SEER Low Average High
------------------------------------------------------------------------
10........................................... 0.96 1.00 1.05
11........................................... 1.08 1.13 1.18
12........................................... 1.20 1.25 1.31
13........................................... 1.35 1.42 1.48
14........................................... 1.65 1.73 1.81
15........................................... 1.87 1.95 2.04
16........................................... 1.98 2.07 2.17
17........................................... 2.13 2.23 2.33
------------------------------------------------------------------------
Table 7.--Split System Heat Pumps--Reverse Engineering Manufacturer Cost
Multipliers
------------------------------------------------------------------------
SEER/HSPF Low Average High
------------------------------------------------------------------------
10/6.8......................................... 0.96 1.00 1.05
11/7.1......................................... 0.97 1.01 1.06
12/7.4......................................... 1.05 1.10 1.15
13/7.7......................................... 1.29 1.35 1.41
14/8.0......................................... 1.57 1.65 1.72
15/8.2......................................... 1.79 1.87 1.96
16/8.4......................................... 1.92 2.01 2.10
------------------------------------------------------------------------
Table 8.--Single Package Air Conditioners--Reverse Engineering
Manufacturer Cost Multipliers
------------------------------------------------------------------------
SEER Low Average High
------------------------------------------------------------------------
10........................................... 0.96 1.00 1.05
11........................................... ....... ....... .......
12........................................... 1.08 1.14 1.19
13........................................... 1.33 1.40 1.46
------------------------------------------------------------------------
Table 9.--Single Package Heat Pumps--Reverse Engineering Manufacturer
Cost Multipliers
------------------------------------------------------------------------
SEER/HSPF Low Average High
------------------------------------------------------------------------
10/6.8......................................... 0.96 1.00 1.05
11/7.1......................................... ...... ....... ......
12/7.4......................................... 1.11 1.16 1.22
------------------------------------------------------------------------
iii. Design Option Approach
Industry representatives contended that the design option approach
can only be conducted by industry personnel with years of experience,
but the industry is not willing to provide this expertise because of
the expense involved. (Jim Crawford, Trane; David Lewis, Lennox; Ted
Leland, ARI, Transcript, pp105-106) The industry also stated that DOE
should not provide funds for others to carry out this
[[Page 66315]]
approach because they lack the necessary expertise.
In contrast, ACEEE and OOE believe that the design option approach
has merits (Steven Nadel, ACEEE, Transcript, p 108; OOE, #7). ACEEE
stated that it can be useful for evaluating new technologies, while OOE
believes it is the approach of choice for conducting the Engineering
Analysis, since the impact of any single technology on cost and
efficiency is explicitly stated.
The Department used only the efficiency level and reverse
engineering approaches to establish the manufacturer costs of achieving
increased efficiency levels for the following reasons: (1) Central air
conditioners and heat pumps are complex products; (2) a wide variety of
options exist to improve their efficiency; (3) these options interact
in complex ways; and (4) the industry strongly opposed use of the
design option approach and was willing to provide data for the
efficiency-level approach.
iv. Outside Regulatory Changes Affecting the Engineering Analysis
There sometimes occur regulatory changes outside of the EPCA
efficiency standards process that can affect the manufacture of a
product. In some cases, such changes affect the energy efficiency of a
product. The Department has attempted to identify all regulatory issues
outside the efficiency standards process that would influence the
Engineering Analysis.
The central air conditioning and heat pump industry faces the
impending phase-out of HCFC-22, the refrigerant used in almost all the
equipment currently being installed in the U.S. The phase-out of HCFC-
22 begins in the year 2010, and the industry has responded by
conducting in-depth analyses of various HCFC-22 alternatives. The most
notable effort to date has been the ARI's Alternative Refrigeration
Evaluation Program (AREP). Under AREP, several HCFC-22 alternatives
were identified, and their effects on equipment capacity, efficiency,
and longevity, and other variables were established.
Two primary candidates have emerged from the field of alternatives:
R-410A and R-407C. Although R-410A shows promise of being able to
significantly raise equipment efficiencies, its high volumetric
capacity requires systems to be redesigned to handle the significantly
higher discharge pressures. R-407C is a virtual drop-in replacement,
but results in an efficiency degradation of 5-10% relative to HCFC-22.
In response to the issue of alternative refrigerants for HCFC-22,
industry representatives stated that manufacturing costs that will be
submitted will attempt to factor in the impact of switching to R-410A.
(Ted Leland, ARI, Transcript, pp 287-288; Jim Crawford, Trane, p 288;
David Lewis, Lennox, p 290, p 297) In response to a schedule presented
at the 1998 Framework Workshop showing that a new minimum standard
would become effective in the year 2005, the industry representatives
stated that the effective date of any new efficiency standard should
coincide with the phase-out date of HCFC-22 (the year 2010) or be in
the 2006 to 2010 time frame. Additionally, they warned that efficiency
gains through the use of R-410A are not as great as first believed.
In response to industry's proposal to postpone the effective date
of the standard, both ACEEE and OOE stated that DOE should make new
standards effective in 2005. (ACEEE, #5; OOE, #7; Steven Nadel, ACEEE,
Transcript, p 298; PG&E, #8) In their view, any delay will compromise
U.S. commitments to reduce global warming gases. OOE offers two
approaches for completing the rulemaking on-schedule: (1) Base the
rulemaking analysis on replacement refrigerants or (2) base the
analysis on HCFC-22 and use a correction factor to adjust equipment
performance based on the use of alternative refrigerants. PG&E adds
that an effective date of 2005 will allow any new building standards
proposed by the California Energy Commission (CEC) to include the
beneficial impact of higher-efficiency air conditioners. PG&E states
that if standards are delayed to 2010, then over 500,000 new California
dwellings would be significantly less efficient.
The Department has determined that the phase-out date for HCFC-22
is far enough in the future that it will not affect a manufacturer's
ability to meet any new efficiency standards, whether using HCFC-22
before the phase-out, or using alternative refrigerants before and
after the phase-out. The Department does not plan to delay the
effective date of any new standards to coincide with the phase-out date
of HCFC-22. The Engineering Analysis has therefore been based on the
assumption that equipment will use HCFC-22. However, the Department
recognizes that equipment design changes to accommodate alternate
refrigerants may alter the manufacturing cost-efficiency relationship
developed for HCFC-22 equipment. The Department welcomes input
regarding the analysis of equipment designed for alternate
refrigerants.
Other non-regulatory issues of concern to the industry include the
need to make systems increasingly tighter to prevent refrigerant leaks
due to the use of HCFC-based refrigerants (David Lewis, Lennox,
Transcript, p 298), and international standardization of test
procedures. (Jim Crawford, Trane, Transcript, pp 298-299). The
Department has not explicitly addressed these concerns in its current
analysis but welcomes any comments as to how to address these issues in
the course of the rulemaking.
2. Manufacturing Costs
a. General
In addition to being inputs to the Engineering Analysis,
manufacturing costs are used as the means of determining retail prices,
and are needed for the manufacturer impact analysis.
b. Product Specific
Two sets of manufacturing costs were prepared. Using an efficiency-
level approach, ARI collected data from individual manufacturers and
submitted incremental manufacturing cost estimates. The Department also
conducted a reverse engineering analysis to determine manufacturing
costs. This analysis included an assessment of uncertainty and
variability among manufacturers.
Baseline manufacturer costs, i.e., the costs associated with
producing equipment with efficiencies of 10 SEER, were also developed
through the reverse engineering analysis. Table 10 shows the baseline
manufacturer costs developed for the four primary product classes for
systems with cooling capacities of approximately 3 tons (36,000 Btu/
hr). Note that for split system air conditioners, two costs were
developed; one for systems sold without indoor blowers and the another
for systems sold with indoor blowers. (A split system air conditioner
is usually sold without an indoor blower when the air conditioner's
indoor unit is installed in conjunction with a heating furnaces that is
equipped with a blower). The uncertainty and variability of the
baseline costs are noted in the manufacturer cost multipliers derived
in the reverse engineering analysis (Tables 6 to 9) in the rows
identified as 10 SEER/6.8 HSPF.
Table 10.--Baseline Manufacturer Costs
------------------------------------------------------------------------
Without With
Product Class blower blower
------------------------------------------------------------------------
Split System A/C.................................... $367 $454
[[Page 66316]]
Split System Heat Pump.............................. ........ 615
Single Package A/C.................................. ........ 534
Single Package Heat Pump............................ ........ 589
------------------------------------------------------------------------
i. Characterizing Uncertainty
Consistent with the Process Rule, DOE places a range around the
average manufacturing costs of achieving various efficiency levels. The
OOE concurs with DOE's plan for dealing with uncertainty and
variability in manufacturer cost estimates. (OOE, #7) The ranges of
costs are used to generate retail prices for the consumer LCC Analysis,
and are used in the Industry Cash Flow Analysis.
ARI collected data from manufacturers and developed a shipment-
weighted mean, along with minimum and maximum cost multipliers for each
efficiency level to account for variability and uncertainty. Since the
actual distribution of manufacturer costs were not provided to the
Department, only the shipment-weighted means were used in the
calculation of retail prices and, in turn, the LCCs.
In conducting the reverse engineering approach, the Department
developed a range of cost estimates for each efficiency level. For each
efficiency level in each product class, the range of cost estimates
were approximated by multiplying the mean value by a uniform
distribution (from 95% of the mean to 105% of the mean) and a normal
distribution (centered on the mean, with a standard deviation of 1.9%).
The resulting cost distributions were then used in the calculation of
retail prices and, in turn, the LCCs.
ii. Variability in Cost Among Manufacturers
The Department is committed to assessing the differential impacts
of standards on different manufacturers. The results are used as inputs
for the sub-group analysis of manufacturing impacts, which entails
calculating cash flows separately for each class of manufacturer.
In previous analyses for other appliances, manufacturing costs
submitted to DOE have demonstrated large variability. In line with the
Department's preference, ARI therefore collected cost data
disaggregated by manufacturer, although, as discussed earlier, ARI
provided to the Department only aggregated shipment-weighted
manufacturer costs. Under the efficiency-level approach, this same
disaggregated company-specific cost information developed for the
Engineering Analysis can be used to perform Government Regulatory
Impact Analysis for each manufacturer or manufacturer subgroup. These
aggregated data, however, were insufficient to generate distributions
of costs by manufacturer. Therefore, only mean values were used in the
subsequent LCC Analysis.
iii. Proprietary Design
The Department considers in its analysis all design options that
are commercially available or present in a working prototype, including
proprietary designs. OOE stated that designs meeting the stated
criteria of a proprietary design should be analyzed as a design option,
providing the example of the microchannel heat exchanger (OOE, #7).
Proprietary designs are considered in the Department's engineering and
economic analyses. The Department looked at the potential impact of
proprietary heat exchanger and compressor designs plus any proprietary
designs that were part of equipment which were analyzed in the course
of the reverse engineering analysis.
The Department considered the potential impact of proprietary
designs as part of its preliminary assessment of design options. Its
initial conclusion is that the inclusion of proprietary designs will
not materially affect the results of the Engineering Analysis because
equipment can achieve the same efficiencies competitively using non-
proprietary designs. The Department intends to continue examining this
issue during the Manufacturing Impact Analysis and welcomes input on
the appropriateness of considering proprietary designs.
D. Life-Cycle Cost (LCC) and Payback Analysis
In determining economic justification, EPCA directs the Department
to consider a number of different factors, including the economic
impact of potential standards on consumers. EPCA also establishes a
rebuttable presumption that a standard is economically justified if the
additional cost of purchasing a product, attributed to the standard, is
less than three times the value of the first year energy cost savings.
EPCA, section 325(o)(2)(B)(iii), 42 U.S.C. 6295 (o)(2)(B)(iii).
To address these provisions the Department calculates changes in
LCCs to the consumers that are likely to result from the proposed
standard, as well as two different simple payback periods, i.e.,
distribution of payback periods, and a payback period calculated for
purposes of the rebuttable presumption clause. The effects of standards
on individual consumers include changes in operating expenses (usually
lower) and changes in total installed cost (usually higher). The net
effect is analyzed by calculating the change in LCC as compared to the
base case. The base case manufacturing cost is determined in the
reverse engineering analysis. The LCC calculation considers installed
consumer cost (equipment purchase price plus installation cost),
operating expenses (energy, repair, and maintenance costs), appliance
lifetime, and discount rate. The LCC Analysis is performed from the
perspective of the consumer.
At the ANOPR stage, the Department generates LCC and payback period
results as probability distributions using a simulation based on Monte-
Carlo methods, in which inputs to the analysis consist of probability
distributions rather than single-point values. As a result, the Monte
Carlo analysis produces a range of LCC and payback period results
rather than single-point values. A distinct advantage of this type of
approach is that the percentage of consumers achieving LCC savings or
attaining certain payback values due to an increased efficiency
standard can be identified in addition to the average LCC savings or
average payback for that standard. Because the analysis is being
conducted in this manner, the uncertainties associated with the various
input variables (as described in the next paragraph) can be expressed
as probability distributions. During the post-ANOPR consumer analysis,
the Department will evaluate additional parameters, and prepare a
comprehensive assessment of the impacts on sub-groups of consumers.
The LCC and one of the payback periods (distribution of payback
periods) are calculated using the LCC spreadsheet model developed in
Microsoft Excel for Windows 95, combined with Crystal Ball (a
commercially available software program), based on probability
distributions of input variables. The second payback, the Rebuttable
payback based on DOE test procedure assumptions for estimating annual
energy consumption, is not calculated using Crystal Ball and input
probability distributions, but is instead based on the spreadsheet
option allowing single-values for the input variables.
[[Page 66317]]
Based on the results of the Engineering and LCC Analyses, DOE
selects candidate standard levels for a more detailed analysis. The
range of candidate standard levels typically includes: (1) The most
energy-efficient combination of design options or most energy-efficient
level; (2) the efficiency level with the lowest LCC; and (3) an
efficiency level with a payback period of not more than three years.
Additionally, candidate standard levels that incorporate noteworthy
technologies or fill in large gaps between efficiency levels of other
candidate standards levels may be selected.
The payback, for purposes of the rebuttable presumption test,
attempts to capture the payback to consumers affected if a new standard
is promulgated. It compares the purchase cost and energy use of central
air conditioners and heat pumps consumers would buy in the year the
standard becomes effective with what they would buy without a new
efficiency standard. In some cases, this means comparing the baseline
energy efficiency and cost with those associated with the standard
level. In other cases, the standard level would also be compared to a
higher-efficiency appliance purchased without new standards (but at a
lower efficiency than the trial standard level). A weighted average of
these payback periods, in the year a new standard level would take
effect, is considered the payback for purposes of the rebuttable
presumption clause.
In addressing the usefulness of the LCC Analysis, an industry
representative asserted that LCCs have no relationship to market
dynamics, have no relationship to what the customer will buy, and have
no relationship to the cost effectiveness of any efficiency standard.
(Jim Crawford, Trane, Transcript, pp 135) But section
325(l)(2)(B)(I)(II) of EPCA requires the Department to consider the
savings and costs of standards, and virtually mandates performance of
an LCC Analysis.
One commenter during the Framework Workshop stated that tax credits
[incentives] for consumer purchases of high efficiency equipment should
be included in the LCC Analysis. (Transcript, pp 243) The Department
has not considered tax incentives in the LCC Analysis being presented
here, because there are no such tax benefits available under Federal
law. However, the Department seeks specific information from
stakeholders regarding whether the Department should consider LCC
analyses with alternative tax incentive scenarios.
1. LCC Spreadsheet Model
a. General
This section describes the LCC spreadsheet model used for analyzing
the economic impacts of possible standards on individual consumers. The
LCC spreadsheet model is available on the Department's web site for use
by interested parties who wish to modify the assumptions in the models
and view the results of those changes. The LCC Analysis is conducted
using a spreadsheet model developed in Microsoft Excel for Windows 95,
combined with Crystal Ball. The Model uses a Monte Carlo simulation to
perform the analysis considering uncertainty and variability. The
spreadsheet is organized so that ranges (distributions) can be entered
for each input variable needed to perform the calculations.
The Department wishes to consider the impacts of varying regional
climate, energy prices, and consumer behavior on LCCs and payback
periods. Calculations were therefore based on a Monte Carlo uncertainty
analysis in which variables are represented by probability
distributions of values. With this approach, the Department could
express LCCs and payback periods as national means, with ranges that
fully account for regional variations in climate, electricity cost, and
behavior. The spreadsheet has the capability to sample subsets of
households for the analysis of particular sub-populations, e.g., low
income households, and will be used for Consumer Sub-Group Impact
Analysis prior to issuance of the NOPR.
An industry representative commented that an LCC Analysis based
upon uncertain or distributional inputs is suspect and totally
unverifiable if the uncertainty of the inputs cannot be clearly
defined. (Jim Crawford, Trane, Transcript, pp 252-254) He suggested
that a simpler approach be used. Others supported the use of a
distributional LCC Analysis, commenting that this approach is better
than what has been used in prior rulemakings. (Charles Stephens, OOE;
Michael Martin, CEC, Transcript, pp 256) EEI stated that the use of
ranges of values for appliance price and life, fuel costs, energy
usage, and discount rates follows recommendations provided by the
Appliance Standards Advisory Committee. (EEI, #2) OOE asserts that use
of a distributional analysis creates potential pitfalls in accounting
for regional climatic and energy price variations. Use of traditional
methods for screening out design options based upon increased LCC or
excessively long payback periods will be more difficult as results for
one region may demonstrate that a design option is economically
attractive while another region does not. DOE must establish some basis
for rejecting or retaining design improvements. (OOE, #7) Although the
use of distributional LCC Analysis may be more complex, the Department
has decided it is the best approach to use to capture the uncertainty
and variability inherent in input variables. In response to OOE's
concerns for selecting appropriate standard levels, the Department will
keep in mind their concerns when selecting appropriate standard levels
for the NOPR.
In order to generate the distributions required for the analysis,
the Department used the Energy Information Administration's (EIA's)
Residential Energy Consumption Survey (RECS). The 1993 RECS is based on
a representative sample of 7,111 households from the population of all
primary, occupied residential housing units in the United States. Each
household is weighted so that the data properly represent the 96.6
million households in the 50 states and the District of Columbia
reported in the 1993 RECS.
RECS estimates end-use energy consumption and reports the age of
equipment as well as household energy prices. Of the over 7,000
households surveyed in RECS, 2550 households representing 35.6% of the
housing population have a central air conditioner while 651 households
representing 8.3% of housing population have an electric heat pump. The
distribution of LCC and payback results are generated by performing an
LCC and payback calculation for each RECS household with a central air
conditioner or heat pump. For example, in conducting the LCC Analysis
for a 12 SEER standard level for central air conditioners, all RECS
households with a central air conditioner have their existing equipment
``replaced'' first with a baseline (i.e.,10 SEER) system. The
corresponding LCCs of the baseline systems are then calculated. Then
all RECS households with a central air conditioner have their existing
equipment ``replaced'' with a 12 SEER system and the LCC of these
systems are established. On a household-by-household basis, the payback
periods and the LCC differences of the 12 SEER system are determined
relative to the economics of the baseline system. The result is a
distribution of LCCs and payback periods. Since climatic conditions and
consumer behavior affect the energy consumption of a given
[[Page 66318]]
piece of equipment, these data implicitly account for regional
variations. Similarly, variations in the RECS energy price data
represent the range faced by consumers in the U.S.
Both EEI and EMPA warned of problems using the RECS data in a LCC
and Payback Analysis. (EEI, #2; EMPA, #3) EEI asserts the following:
(1) The age of the RECS data (1993) is too old to be used with
efficiency and price data from 1998, (2) only total annualized average
electricity and fuel rates rather than summer marginal rates are
provided, (3) the stated age of the equipment may be inaccurate if the
households surveyed are not original homeowners, and (4) there is no
accounting of equipment used in small commercial facilities. EEI also
claims that RECS may not reflect regional or national equipment
saturations as the 1993 RECS shows that 42% of survey homes have a
central air conditioner while an industry publication (ACHR News, June
22, 1998) shows saturations ranging from 55% in the western U.S. to 99%
in the southern U.S. EMPA questioned whether the 7,000 to 8,000
households surveyed households in RECS can be representative of the 90
million households in the U.S. They also commented that RECS experts
from EIA needed to provide a written statement in support of the way in
which DOE plans to use the RECS data in its LCC analyses. In contrast
to these comments, OOE states that they are very comfortable with the
analysis methodology as it was applied to other products (clothes
washers) where RECS data was used to determine annual energy use and
equipment age. (OOE, #7)
Although the Department understands the concerns of the EEI and
EMPA, the 1993 RECS data is the most recent and appropriate database
available for conducting the desired distributional LCC Analysis. DOE
plans to conduct updates to the LCC and Payback Period Analysis with
the 1997 RECS. Use of this data will address most of the concerns
brought up by both EEI and EMPA.
Estimates of the efficiency of equipment currently in use are based
upon the age of the equipment as established by RECS and historical
shipment-weighted efficiency values. The age of the equipment
establishes the year of manufacture which in turn, using the shipment-
weighted efficiency data, allows for the determination of the
equipment's most probable efficiency. Replacing existing equipment with
new equipment results in reductions in energy consumption. These
reductions were approximated by multiplying current energy use by the
ratio of the efficiencies of existing and new equipment. Using an
energy price allowed for the calculation of the operating costs of
existing and new replacement equipment, and, in turn, the LCCs and
payback periods associated with different efficiency levels of new
equipment.
The Department developed LCCs and payback periods based on both
sets of manufacturer cost estimates developed in the Engineering
Analysis: (1) The ARI cost data developed through the efficiency-level
approach, and (2) the cost data developed through the reverse
engineering analysis.
A more detailed description of the methodology and contents of the
RECS database is contained in the Preliminary TSD.
b. Product Specific
This section discusses the approaches for analyzing the economic
impacts on individual consumers from potential new central air
conditioner and heat pump standards. An LCC spreadsheet model,
described previously in Section II.D.1.a, is used to calculate two of
the economic impacts, LCC and payback period, based on input variables
that have uncertainty and variability expressed with probability
distributions. A third economic impact, Rebuttable Payback Period, is
determined without the use of the spreadsheet model. In future
analyses, all three of these economic metrics will be compared to
baseline efficiencies of appliances sold in the year the new standard
would take effect. In this preliminary analysis, only the Rebuttable
Payback Period is compared to a distribution of efficiencies forecasted
to the year 2006.
i. LCC Analysis
The Department determined values of input variables for central air
conditioners and heat pumps, including total installed cost (consisting
of both the equipment purchase price and installation price), annual
energy use, lifetime, repair costs, and maintenance costs of equipment,
as well as average energy prices, marginal energy prices, and discount
rate. Table 11 summarizes some of the major assumptions used to
calculate the consumer economic impacts of various energy-efficiency
levels.
Table 11.--Assumptions Used in the LCC Analysis
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Total Installed Cost: Equipment Purchase Price......... Manufacturer cost multiplied by manufacturer markup,
distributor markup, dealer markup, and sales tax.
Installation Price................................. Central air conditioners--$1190; heat pumps--$2035.
Existing Equipment Efficiency.......................... Distribution imputed from RECS database based on
equipment age and historical shipment-weighted
efficiencies (central air conditioners--5.3 to 15.2
SEER, weighted average of 8.58 SEER; heat pumps--5.3
to 15.2 SEER, weighted average of 8.72 SEER; 4.88 to
9.67 HSPF, weighted average of 6.52 HSPF).
Existing Annual Energy Use............................. Distribution from RECS database (central air
conditioners--174 to 12,929 kWh/yr, weighted average
of 2629 kWh/yr; heat pumps--space-cooling equals 0 to
14,771 kWh/yr, weighted average of 2987 kWh/yr; space-
heating equals 162 to 29,839 kWh/yr, weighted average
of 4658 kWh/yr).
Average Energy Prices.................................. Historical--distribution from RECS database (central
air conditioners--2.70 to 16.50 cents/kWh, weighted
average 8.49 cents/kWh; heat pumps--2.60 to 13.00
cents/kWh, weighted average 7.86 cents/kWh);
projections--AEO--1999.
Marginal Energy Prices................................. Historical--estimated from RECS database (central air
conditioners--0.58 to 19.42 cents/kWh, weighted
average 8.74 cents/kWh; heat pumps--0.82 to 18.62
cents/kWh, weighted average 7.99 cents/kWh);
projections--scaled to trends in average energy
prices.
Lifetime............................................... Distribution based on empirical data (mean life is 18.4
years).
Discount Rate.......................................... Distribution (0% to 19%, weighted average 6.51%)
Repair Costs........................................... For systems with efficiencies of 10 SEER or greater
than 12 SEER, one-half equipment price divided by mean
lifetime. For systems with efficiencies of 11 or 12
SEER, 1% greater than the 10 SEER repair cost.
Maintenance Costs...................................... Distribution ($0 to $135/year, weighted average $36/
year).
----------------------------------------------------------------------------------------------------------------
[[Page 66319]]
Total Installed Cost: The total installed cost consists of the
equipment purchase price and the installation price. Markups are used
to convert the manufacturer cost to the equipment purchase price. The
determination of equipment purchase prices is described in the next
section.
Installation Price: The installation price represents all costs
required to install the equipment other than the marked-up equipment
cost. The installation price includes labor, overhead, and any
miscellaneous materials and parts such as linesets. For central air
conditioners the installation price used in the analysis used is $1190,
and for heat pumps it is $2035. The installation price was determined
by subtracting the derived equipment purchase price from the typical
total installed cost. The typical total installed cost values were
collected from public sources and phone calls to heating ventilating
and air conditioning (HVAC) contractors. While the data collected were
for split systems, the Department has assumed the installation prices
apply to single package systems, although installation price for these
systems might be somewhat lower than for the split systems, since only
single packages are involved and no line sets are required. The
Department is interested in obtaining information on the installation
prices for all classes of products.
Annual Energy Use: Currently, the DOE test procedure calculates
annual cooling and heating energy consumption based on 1,000 and 2,080
hours of operation, respectively. Although this procedure seems to be
widely accepted for comparing the seasonal performance of different
units, the procedure overstates equipment energy use compared to RECS
estimates. As described above, basing operating and LCC on RECS
household data provides a more accurate measure of the savings possible
from more-efficient equipment, and accounts for variability in LCCs due
to climatic conditions and energy prices.
Variations in energy use for a particular appliance can depend on
factors such as climate, type of household, people in household, etc.
For purposes of this analysis, annual energy use was based on the
annual end-use energy consumption values in RECS. Climatic and consumer
behavior are inherent to the RECS energy use data. The Department will
perform sensitivity analyses prior to issuance of the NOPR to consider
how differences in energy use will affect sub-groups of consumers.
For the RECS households with central air conditioners, the range of
annual space-cooling energy consumption is 174 to 12,929 kWh/year with
a weighted-average value of 2629 kWh/year. For the RECS households with
heat pumps, the range of annual space-cooling energy consumption is 0
to 14,771 kWh/year with a weighted-average value of 2987 kWh/year. The
annual space-heating energy consumption for households with heat pumps
ranges from 162 to 29,839 kWh/year with a weighted-average value of
4658 kWh/year.
For each RECS household equipped with either a central air
conditioner or heat pump, the annual energy use associated with a
particular standard level is calculated by taking the annual energy use
associated with the existing system and multiplying it by the ratio of
the existing system's efficiency to the efficiency of the standard
level of interest. To illustrate this approach, this calculation
procedure is carried out here based on the weighted-average annual
energy use and the weighted-average efficiency from all RECS households
equipped with central air conditioners. As presented earlier, for all
RECS households with a central air conditioner, the weighted-average
annual energy use and the weighted-average efficiency are 2629 kWh/year
and 8.58 SEER, respectively. Thus, for the case of a 12 SEER air
conditioner, the weighted-average annual energy use is determined
according to the following expression:
Weighted-average annual energy use of 12 SEER A/C = 2629 kWh/yr 4 x
(8.58 SEER 12 SEER) = 1880 kWh/yr
Of course, as the efficiency of the standard level being analyzed
increases, its corresponding annual energy use decreases
proportionally. It should be noted that in the case of establishing the
annual space-heating energy use of heat pumps, the ratio of HSPF values
are used rather than the SEER values. It must also be emphasized that
the above calculation is illustrative only. In order to generate the
distribution of LCC and payback results for a particular standard
level, each RECS household that is equipped with a central air
conditioner or heat pump is analyzed.
Concerning use of RECS data in the economic analysis, EEI stated
that, although energy use is dependent on equipment design, weather,
and consumer operation, it is also a strong function of house design,
landscape, and thermostatic controls, and their impacts should be taken
into consideration. (EEI, #2) They also stated that EER ratings, in
addition to SEER ratings, ranges of cooling capacity, and the climatic
impact on hours of operation, should also have an impact on energy use
and should also be considered. With regard to the annual operating
hours, EEI stated that a range of values based upon end-use metering
studies, load management programs, and other utility or research
organization studies should be used. They cited state utility
commissions, Internet web sites, and software providers as possible
sources for determining variations on energy use.
As stated earlier, the Department believes that the 1993 RECS is
the most recent and appropriate data available. In addition to the
equipment design, weather, and consumer operation, the RECS annual end-
use estimates also consider the household's shell characteristics
including any prominent shading. Past RECS data sets have been
validated against end-use metering studies in an attempt to better its
procedures for estimating end-use energy consumption. Although the
Department is comfortable with the use of RECS as its source for
establishing annual energy consumption, interested parties are welcome
to present any metered end-use data that could verify or substitute for
the RECS estimates.
Average Energy Prices: As discussed above, the Department is using
RECS household data to establish energy prices. Projections of future
energy prices for the LCC Analysis use high, low, and reference case
projections of national average electricity prices to residential
customers. The current edition of EIA's Annual Energy Outlook (AEO) is
used as the source of projections for uncertainty in the LCC analysis.
For the RECS households with central air conditioners, the range of
average electricity prices in 1993$ is 2.70 to 16.50 cents/kWh with a
weighted-average value of 8.49 cents/kWh. For the RECS households with
heat pumps, the range of average electricity prices is 2.60 to 13.00
cents/kWh with a weighted-average value of 7.86 cents/kWh. While
average energy prices establish the annual electricity cost of baseline
equipment (i.e., split-system air conditioners with efficiencies of 10
SEER and heat pumps with efficiencies of 10 SEER and 6.8 HSPF),
marginal energy prices establish savings in electricity costs
associated with increased efficiency standards.
Both EEI and EMPA stated that the average energy prices in RECS are
outdated and that marginal energy prices should be used in their place
in conducting the LCC and Payback Analysis. (EEE, #2; EMPA, #3) Both
[[Page 66320]]
pointed to subtracting out the fixed cost portion of the price as an
interim step in developing marginal prices. EEI suggested several data
sources for developing marginal prices including state utility
commissions, Internet web sites such as the PowerRates site, and
software providers such as such as EPS solutions and Energy
Interactive. EMPA stated that any work to identify marginal energy
costs should include a detailed description of the methodology and that
any data collection efforts must comply with Paperwork Reduction Act.
ACEEE noted how air conditioners are used during peak periods when the
cost of supplying electricity is high and that price data should be
collected during these periods for use in the economic analyses.
(ACEEE, #5)
Regarding future energy prices, several participants at the 1998
Framework Workshop stated that future residential electricity prices
will be dependent on the how the electric utility industry is
restructured. (Transcript, pp 220-230) EMPA was critical of EIA's
forecasts of future energy prices, stating that the forecasts have
consistently underestimated rates, and that EIA's forecasting models do
not reflect the factors resulting from the deregulation of the electric
utility industry. (EMPA, #3)
The Department used the most recent forecasts from the 1999 AEO to
predict the trend in both average and marginal electricity prices by
multiplying the average and marginal price for the base year (1998) by
the AEO's forecasted relative electricity price increases and/or
decreases. In addition, LCC and payback spreadsheets can be run with
price forecasts from the Gas Research Institute (GRI). The Department
believes these forecasts are the most reliable available to predict
future energy trends.
Marginal Energy Prices: Marginal energy prices are those prices
consumers pay for the last units of energy used. Marginal prices
reflect a change in a consumer's bill associated with a change in
energy consumed, consequently, marginal energy prices, rather than
average energy prices, are appropriate for determining energy cost
savings associated with increased efficiency standards. For LCC
analyses, the Advisory Committee recommended that DOE use the full
range of consumer marginal energy prices instead of national average
energy prices. Absent consumer marginal energy price information, the
Committee recommended DOE use a range of net energy prices, calculated
by removing all fixed charges. The Department agrees the use of
marginal energy prices improves the accuracy of the LCC Analysis and
has estimated marginal prices for electricity and natural gas.
The Department estimated consumer marginal electricity and natural
gas prices directly from household data in the 1993 RECS survey by
calculating the slopes of the regression lines of customers' bills vs.
energy consumption for these two fuels. Those slopes are equal to the
change in bill divided by the change in energy consumption, that is,
the marginal prices paid by each household. Since this rulemaking
concerns only energy efficiency standards that apply to electrically-
driven central air conditioners and heat pumps, only marginal
electricity prices are of concern here.
For electricity, the Department calculated separately the slopes of
the regression lines for four summer months (June-September) and for
the remaining (``winter'') months. The annual marginal price was
derived by taking the weighted average of the two seasonal prices,
where the weighting was the relative energy consumption of the
appliance in each season. For air conditioners/heat pumps, the
weighting was based on the regional location and age of each of the
households in the RECS sample.
Given restructuring of parts of the energy supply sector, customers
may have more than one bill (e.g., one from the distribution company,
and one or more from generators or suppliers). To capture complete
information, future surveys would best gather energy pricing
information directly from customers, rather than from utilities or
local distribution companies. Efficient collection of energy pricing
information in the future will require changing the current processing
of the billing information so as to gather consumption by month and
pricing information for each customer from the bills. The pricing
information would comprise the applicable rate schedule, including
marginal prices, fixed charges, and demand charges for commercial and
industrial customers, or time-of-use rates where applicable. The Office
of Energy Efficiency and Renewable Energy has expressed the need for
these data in discussions with EIA concerning the design of future
surveys.
Until a time series of marginal prices is available, the Department
will use projected trends in energy prices to derive estimates of
consumer marginal energy prices for the economic analysis of proposed
standards. An index (scaling factor) was created relative to current
prices from the trend in average prices (by fuel and sector) and was
applied to the current range of marginal prices. For example, if the
trend in average residential electricity prices was a decline by 20
percent over a given period of time, then we assume the marginal price
for each household would decline from its initial observed value by 20
percent over that same period.
The Department recognizes that a simple scaling of marginal energy
prices may be incorrect in a restructured electric power market.
Therefore, the Department may develop a different approach to forecast
future marginal energy prices when restructuring becomes more widely
implemented.
Given the uncertainty of projections, the Department has made
available to stakeholders the ability to conduct a scenario analysis to
examine the robustness of different efficiency levels under different
energy-price conditions. Each scenario provides a self-consistent
projection, integrating energy supply and demand. The scenarios differ
from each other in the energy prices that result. The Advisory
Committee suggested the use of three scenarios. While many scenarios
can be envisioned, the three scenarios specified are sufficient to
bound the range of energy prices.
The three scenarios suggested by the Advisory Committee are based
on projections in the 1999 AEO. The Department's most recent reference
case, published in the 1999 AEO, provides a well-defined middle
scenario. In addition, DOE can use the scenarios with the highest and
lowest energy prices in the sector from the range of scenarios in the
1999 AEO. The future trend in energy prices assumed in each of the
three scenarios is clearly labeled and accessible in each spreadsheet.
Also included as a scenario is the GRI energy price forecast for 1998.
Stakeholders can easily substitute alternative assumptions in the
Department's web site LCC spreadsheets to examine additional scenarios.
For the RECS households with central air conditioners, the range of
marginal electricity prices in 1993 dollars is 0.58 to 19.42 cents/kWh
with a weighted-average value of 8.74 cents/kWh. For the RECS
households with heat pumps, the range of marginal electricity prices is
0.82 to 18.62 cents/kWh with a weighted-average value of 7.99 cents/
kWh.
As discussed previously under the section describing average energy
prices, marginal energy prices are used to determine the annual
electricity costs associated with energy savings resulting from an
increased efficiency standard (i.e., any efficiency above baseline
efficiencies).
Lifetime: In choosing a value for lifetimes of central air
conditioners and
[[Page 66321]]
heat pumps, a variety of sources were reviewed. These studies on
lifetimes of central air conditioners and heat pumps indicates that
there is a wide range of values for lifetimes. The references are
provided in Table 12, with the mean lifetimes given in years.
Table 12.--Central Air Conditioner and Heat Pump Mean Lifetimes
------------------------------------------------------------------------
In years--
Source ---------------------------
Central AC Heat pump
------------------------------------------------------------------------
Appliance Magazine. The Life Expectancy/ 13.0 14
Replacement Picture, Sept. 1998 a..........
National Association of Home Builders. 15.0 15
Housing Facts, Figures, and Trends, 1998 b.
1995 ASHRAE Applications Handbook c......... 15.0 15
M.E. Bucher et al, American Electric Power ............ d 19
Service Corp. 1990. ``Heat Pump Life and
Compressor Longevity in Diverse Climates'',
ASHRAE Transactions 96(1):1567-1571........
K.A. Pientka, Commonwealth Edison Co. 1987. ............ d 15-16
``Heat Pump Service Life and Compressor
Longevity in a Northern Climate'', ASHRAE
Transactions 93(1):1087-1101...............
C.C. Hiller, EPRI and N.C. Lovvorn, Alabama ............ d 20
Power Co. 1987. ``Heat Pump Compressor Life
in Alabama'', ASHRAE Transactions
93(1):1102-1110............................
J.E. Lewis, Easton Consultants. 1987. 12.1 10.9
``Survey of Residential Air-to-Air Heat
Pump Service Life and Maintenance Issues'',
ASHRAE Transactions 93(1):1111-1127........
MTSC, Inc. Energy Capital in the U.S. 12.0 12
Economy, prepared for the Office of Policy,
Planning, and Evaluation, U.S. Department
of Energy, Nov. 1980 e.....................
------------------------------------------------------------------------
a Based on first-owner use. Central AC min life = 8, max life = 18. Heat
Pump min life = 10, max life = 17.
b Sources: Air Conditioning and Refrigeration Institute; Air
Conditioning, Heating, and Refrigeration News; Air Movement and
Control Association; American Gas Association; American Society of Gas
Engineers; ASHRAE.
c Source for Central A/C: Akalin, M.T. 1978. ``Equipment life and
maintenance cost survey'', ASHRAE Transactions 84(2):94-106. Source
for Heat Pump: ASHRAE Technical Committee 1.8, 1986.
d Median lifetime.
e Based on retirement function.
The available sources report mean and median lifetimes ranging from
10.9 to 20 years. The Department's analysis assumed a mean lifetime of
18.4 years, based on a 1990 ASHRAE technical paper that has the most
recent and most detailed information on heat pump life available, based
on a survey of 2,184 heat pump installations in a seven-state region of
the United States. The sources that report shorter average lifetimes
are based on data of a lesser quality, and the Department considers
those figures are less reliable. For example, in the case of Appliance
Magazine, the reported lifetime values are based on expert opinion
rather than empirical data.
Appliances produced at some future date may have different
lifetimes than those in the same class produced in the past. The
projections of lifetimes and other parameters used in the analysis
should be based on observed empirical trends, as well as expert
knowledge of likely changes in the industry, since future changes are
not always straight-line projections of past trends. While expert
judgement is crucial, however, it must have a strong empirical basis.
With this in mind, the Department believes that the probability
distribution of equipment lifetime used in the analysis is the most
sound, given available evidence of past performance and recent trends.
Because none of the data on equipment lifetime indicates a relationship
between efficiency and lifetime, the Department assumes that equipment
lifetime is independent of efficiency.
EMPA claimed that lifetime should be based on first ownership
rather than actual equipment life. (Glenn Schleede, EMPA, Transcript,
pp 232; EMPA, #3) They stated that homeowners usually change residences
every 7 years. In response to this assertion, it was stated that
although the statute requires that LCC be determined it does not
specify the exact meaning of lifetime. (Mike Rivest, ADL, Transcript, p
236) Counter to EMPA's claims, OOE stated that energy efficiency
benefits are essentially swapped when a homeowner changes residence.
(Charlie Stephens, OOE, Transcript, pp 233; OOE, #7) That is, the new
homeowner will realize the benefits of the first owner's more efficient
equipment. They also add that an equipment lifetime of 15 years seems
reasonable for split system air conditioners, but that field data
indicates that heat pumps have a shorter life.
The Department believes that equipment life rather than first
ownership is the correct measure of lifetime. The Department continues
to seek any additional information that may provide better data on
actual air conditioner and heat pump life.
Discount Rate: Interested parties submitted several comments
recommending values or procedures for determining discount rates. An
industry representative suggested that rates of 18 to 20% may be
appropriate as consumers are paying off credit card debt at these
rates. (Jim Crawford, Trane, Transcript, p 237) He also asserted that
practical (i.e., implicit) discount rates (which are derived from
analyzing actual consumer behavior) may be on the order of 30%. EEI
also believes that credit card interest rates should be used as a basis
for establishing discount rates. (EEI, #2) EMPA believes DOE's discount
rates (as presented at the 1998 Framework Workshop) are too high and
based on faulty assumptions. They stated that discount rates should
reflect the true cost of money that consumers would have to spend to
purchase more efficient appliances. (EMPA, #3) Industry representatives
also stated that questions concerning consumer discount rates should be
included on any market surveys for determining retail prices and that
DOE needs to take into account any information supplied by the
industry's trade association, ARI. (Jim Crawford, Trane, Transcript, p
243; David Lewis, Lennox, Transcript, pp 243-244)
In contrast to these comments, OOE believes that prior discount
rates developed by DOE seem reasonable, although there are differences
in how consumers purchase air conditioner and heat pump equipment
compared to how they purchase other appliances. (OOE, #7) They strongly
disagreed that discount rates in excess of 15% might be appropriate.
They claim such high rates are based on calculating an
[[Page 66322]]
implicit discount rate or market failure factor based on past
shipments.
The Department's Process Rule for establishing new or revised
energy efficiency standards for consumer products describes how real
discount rates are to be established for residential consumers, as
follows:
For residential and commercial consumers, ranges of three
different real discount rates will be used. For residential
consumers, the mid-range discount rate will represent DOE's
approximation of the average financing cost (or opportunity costs of
reduced savings) experienced by typical consumers. Sensitivity
analyses will be performed using discount rates reflecting the costs
more likely to be experienced by residential consumers with little
or no savings and credit card financing and consumers with
substantial savings.
Based on the Department's guidelines provided in the Process Rule,
a distribution of discount rates was derived to reflect the variability
in financing methods consumers use in purchasing central air
conditioners and heat pumps. The real interest rate associated with
financing an appliance purchase is a good indicator of the additional
costs incurred by consumers who pay a higher first cost, but enjoy
future savings, although it is not the only indicator of such costs.
While the method used to derive this distribution relies on a number of
uncertain assumptions regarding the financing methods used by
consumers, DOE believes that the resulting distribution of discount
rates encompasses the full range of discount rates that are appropriate
to consider in evaluating the impacts of DOE standards on consumers
(i.e., values represented by the mid-range financing cost, consumers
with no savings, and consumers with substantial savings), as well as
all the discount rates which fall between the high and low extreme
values.
The method of purchase used by consumers is assumed to be
indicative of the source of the funds and the type of financing used,
although DOE is not aware of detailed research into this relationship.
Consumers purchase appliances as parts of new homes (mortgages) and as
separate retail purchases. Retail purchases are paid by cash, credit
cards, or loans. In the case of space-conditioning equipment, the loans
are assumed to take the form of second mortgages, as central air
conditioner and heat pump purchases often occur when home upgrades are
made. Based upon recommendations provided by the ARI, the shares of the
different financing mechanisms used for purchasing central air
conditioners and heat pumps were assumed to be 30% with a new home
(first mortgages), 25% through loans (second mortgages), 10% paid by
cash, and 35% by use of credit cards.
In order to derive a full distribution of discount rates, DOE
estimated a range of interest rates, based on historical data and
judgments of future trends, for different types of consumer savings or
financing.
For new housing, the Department based its real mortgage rates on
ARI's suggested mean value of 3.0% and assumed a range of 1.6 to 4.4%.
Applying an assumed marginal tax rate of 28% (i.e., the maximum
marginal rate paid by most U.S. taxpayers) and an assumed inflation
rate of 2% results in a mean nominal mortgage rate of 6.94% with a
range of 5.0 to 8.89%.
For second mortgages or loans, ARI suggested a mean real interest
rate of 8.0%. This rate is more representative of a nominal rate for
second mortgages and was used as such. Assuming a tax rate of 28%, then
subtracting an assumed inflation rate of 2% (the same rates used to
derive the new home real interest rates) we arrive at a mean real
interest rate of 3.76%. Nominal minimum and maximum interest rates of
6% and 10% were assumed to arrive at the real interest rate range of
2.32% to 5.20%.
For cash, the minimum rate was assumed to equal 0%. This rate
applies to purchasers making cash purchases without withdrawing from
savings accounts. Based upon ARI's recommendation, the maximum is taken
to be the opportunity cost represented by the interest that could have
been earned in a typical mutual fund (assumed to be 6% real). A real
mean rate of 3% results.
For credit cards, the Department based its real interest rate on
ARI's suggested mean value of 12.5%. Minimum and maximum real rates of
6% and 19% were assumed. It should be noted that the use of these
credit card rates reflects an assumption that all consumers who use
credit cards do so as a means of long term financing for product
purchases, rather than as simply a convenient method of purchase or as
a means of short term financing.
Combining the assumed shares of each financing method, the above
real interest rates result in a weighted-average (mean) value of 6.51%
and a distribution that varies from 0 to 19%. Sensitivity studies show
that while the LCC results are sensitive to the value chosen for mean
discount rate, the LCC results are not sensitive to the distribution of
discount rates.
The Department believes that the above method is a valid basis for
establishing a distribution of discount rates over the full range of
discount rates relevant to most purchasers of the products covered by
this rulemaking, but acknowledges that different assumptions might be
made about likely interest, inflation and marginal tax rates, or about
consumer financing methods, and that different approaches to
identifying valid consumer discount rates might also be valid. For
example, it is also possible to base consumer discount rates on the
average real rates of return on consumer investment or other measures
of the opportunity costs incurred by consumers that purchase the
covered products. DOE does not believe, however, that such alternative
assumptions or alternative approaches would significantly alter the
range of discount rates used by the Department or the conclusions drawn
from the life cycle cost analyses conducted using these discount rates.
The Department is seeking any information that would support
significant alterations in the range or distribution of the discount
rates derived from DOE's analysis. Alternatively, DOE is soliciting
comment on the possible use of a standardized distribution of discount
rates ranging from approximately 4% to 12%, with a mean of 6%. The use
of such a standardized distribution would explicitly recognize the many
uncertainties associated with DOE's current analysis and, based on
sensitivity analyses already performed by DOE, such a standardized
distribution would not significantly alter the conclusions of DOE's
life cycle cost analyses.
Repair Costs: The annual repair cost covers the replacement or
repair of components which have failed. The Department assumed repair
costs for minimum efficiency equipment (10 SEER) and equipment with
efficiencies greater than 12 SEER were equal one-half the equipment
price divided by the mean equipment lifetime. The Department assumed
equipment with efficiencies of 11 and 12 SEER incur a 1% increase in
repair cost over the minimum efficiency (10 SEER) level. The rationale
for assuming essentially flat repair costs through efficiencies up to
and including 12 SEER pertains to the level of technology being used at
these system efficiency levels. Through 12 SEER, system technology
generally does not incorporate sophisticated electronic components
which are believed to incur higher repair costs. Increases in SEER are
generally achieved through more efficient single-speed compressors or
more efficient and/or larger heat exchanger coils. Systems with
[[Page 66323]]
efficiencies beyond 12 SEER start to incorporate modulating blowers or
compressors which are generally believed to be more susceptible to
failure.
Maintenance Costs: The annual maintenance cost covers such items as
checking and maintaining refrigerant charge levels and cleaning heat
exchanger coils. Data from Service Experts, an HVAC service company,
were used to establish maintenance costs. The maintenance cost ranges
from $0 to $135 with a weighted-average value of $36.
EMPA stated that DOE needs to collect and include extended warranty
and service costs in LCC calculations. (Glenn Schleede, EMPA,
Transcript, p 231; EMPA, #3) EMPA also requested that the assumptions
regarding maintenance and repair costs be reevaluated and described in
greater detail. An industry representative supported including these
costs, and also stated that they will be a function of equipment
efficiency. (David Lewis, Lennox, Transcript, p 231) A suggestion was
made to include questions on warranty and service costs on any market
survey for determining retail prices (Steven Nadel, ACEEE, Transcript,
p 232). OOE endorsed the concept of accounting for differences in
maintenance, service, and installation costs, provided these
incremental costs are attributable only to equipment at different
efficiency levels (OOE, #7).
Although the Department included maintenance costs in its LCC
calculations, no attempt was made to account for warranty costs. The
Department assumed that warranty costs are constant with increased
efficiency and, thus, there was no need to explicitly account for
warranty costs. The Department welcomes any comments that can provide
insight as to how warranty costs should be accounted for in the LCC
Analysis.
ii. Equipment Prices
How manufacturing costs and profit margins associated with
standards are passed through from manufacturers to consumers has an
impact on both consumers and manufacturers. Consumer and manufacturer
economics are linked and inversely related. For this reason, equipment
purchase prices used for the LCC Analysis need to be reconciled with
manufacturer costs.
At the pre-ANOPR stage, a consumer LCC curve, based in part on mean
installed consumer costs, is a significant factor in the initial
selection of potential standards levels. Total installed costs are
needed for a base case, absent new standards, and for all efficiency
levels to be considered. As noted earlier, equipment purchase price
coupled with the installation price equals the total installed consumer
cost.
There was a great deal of discussion at the 1998 Framework Workshop
concerning equipment or retail prices, because equipment prices were
being viewed as a means to verify industry-supplied manufacturer cost
data. Much of the discussion focused on the correlation between
manufacturer costs and prices. Some claimed that there is practically a
random relationship between manufacturer costs and prices and that
prices are based more upon market dynamics rather than improvements in
equipment efficiency. (Jim Crawford, Trane, Transcript, pp 90, 139-140)
It was also stated that, due to the tremendous variability in city
size, dealer groups, dealer size, dealer proximity to warehouses, bulk
purchasing, and national account purchasing, the markups involved in
converting manufacturer costs to retail prices are highly variable.
Also, because some manufacturers use distributors while others do not,
markups can vary significantly from manufacturer-to-manufacturer.
(David Lewis, Lennox, Transcript, pp 168-170) It was also noted that
markups are unlikely to be constant across all efficiencies. (Jim
Crawford, Trane, Transcript, pp 154)
In order better to determine equipment prices, participants at the
Workshop agreed that it would be appropriate to conduct a market
survey. There was discussion as to whether the survey should be
administered to contractors or consumers. It was pointed out that
contractors may not provide true prices as they may not want to reveal
their profit margins while consumers may simply not know the price of
only the equipment (i.e., the price exclusive of the labor, materials
and profit for installation). (Transcript, pp 170-186) With regard to
price data that may be collected from utilities, some of it might be
distorted due to demand side management (DSM) incentive programs, more
specifically rebate programs. The price collected may not be the actual
price of the equipment, but rather, the price after a rebate has been
applied. (Steve Rosenstock, EEI, Transcript, pp 190)
In written comments, EEI stated that there is little correlation
between manufacturer costs and retail prices, and that market surveys
of customers, utilities, and contractors will likely provide the best
information on retail prices. (EEI, #2) EMPA claimed that price data
collected will likely not reflect conditions in the current market.
(EMPA, #3) EMPA also stated that DOE should not shift the
responsibility of collecting and providing data to interested parties.
ACEEE noted two possible data sources: a 1996 Xenergy report and
Chris Neme at the Vermont Energy Investment Fund in Burlington, VT.
(ACEEE, #5) OOE suggested that two methods are needed for deriving
prices, each as a cross-check on the results of the other. (OOE, #7)
One approach should be a ``mark-up'' of manufacturer costs which yield
a range of retail prices. A market survey of equipment prices should be
used as the second approach, as opposed to a survey of market experts
trying to predict consumers' willingness to pay at various price
levels. With regard to current market prices, PG&E believes that split
system air conditioning equipment that exceeds 10 SEER are available at
competitive prices with 12 SEER systems being readily available. (PG&E,
#8)
For the pre-ANOPR Analysis, the Department did not attempt to
conduct a comprehensive contractor or consumer survey of equipment
prices. The primary reasons were the complexity of and the time needed
for a comprehensive survey, and the short time frame allotted by the
Department for publishing the Supplemental ANOPR. The Department will
consider conducting a survey for any updates to the analyses conducted
for the NOPR.
On November 30, 1998, however, the Department issued a Federal
Register Notice (63 FR 65767) requesting comments on a proposal to
survey retail prices for Central Air Conditioners and Heat Pumps. ARI
responded to that request by submitting comments. The comments asserted
that the proposed survey is woefully inadequate, given the number of
variables involved. (ARI, #9) ARI suggested that, at a minimum, data on
the following factors should be considered: (1) Three capacity sizes
(1.5, 3, and 5 tons), (2) five efficiency levels (10, 11, 12, 13, 14
SEER), and (3) four classes (split and single package air-conditioner/c
and heat pump). The survey should be weighted to reflect regional sales
markets and a large number of manufacturers should be represented in
the survey. In addition, there should be no reason to include questions
on the impact of utility rebates, as they are dwindling rapidly.
The Department uses various assumptions about cost pass-through
that are reflected in the price forecast approach. The output of this
analysis is a table describing retail prices for each possible
efficiency level, assuming that each level represents a new minimum
efficiency standard. Consistent with the
[[Page 66324]]
process rule, and building on the estimates generated by the various
assumptions, projected retail prices are described within a range of
uncertainty.
Purchase prices of baseline equipment were determined by estimating
manufacturing costs and applying appropriate markups along the
distribution chain. Markups were determined in two ways: through
surveys of distributor (wholesale) and retail prices, and through
publicly available financial reports. For about 90% of residential air
conditioning equipment, the distribution chain includes manufacturers,
distributors (wholesalers), and dealers (contractors). Equipment
purchase prices are thus estimated as the product of manufacturing
cost, manufacturer markup, distributor markup, dealer markup, and sales
tax.
For the determination of markups via financial reports, it was
assumed that product markups equal gross margin less pre-tax profit
margin (earnings-before-taxes) and outbound freight of 6%, plus 1%. The
baseline central air conditioner and heat pump units covered by this
analysis typically have lower margins than other products handled by
diversified companies. The values for markups given in the next
paragraphs may change in future stages of analysis as the underlying
data are improved and cross-checked.
Manufacturer Markup: Financial reports from five publicly traded
air conditioner manufacturers, representing 75% of the market, were
examined for a five-year period (1993-1997). Five-year average markups
for the two most dependent on air conditioner sales were 1.18 and 1.17
respectively. The other three companies are more diversified and, as
expected, exhibited higher markups--1.25, 1.24, and 1.18 respectively.
A central value of 1.18 was chosen for the Price Analysis, with a range
of 1.15 to 1.26, based on the lowest and highest markups for the five
manufacturers for the five-year period.
Distributor Markup: Five-year average markups for the 500 members
of the Air-conditioning and Refrigeration Wholesalers (ARW) were 1.37,
the same as for 1997. This value was used for the analysis. However,
since margins for after-market parts are substantially higher than
margins for baseline equipment, the actual markup on baseline equipment
is likely to be lower than the assumed value of 1.37. The markup value
may be revised downwards based on future information.
Dealer Markup: Markups were calculated for contractors represented
by the Air Conditioning Contractors of America (ACCA) and two
contractor consolidators that focus on the residential market.
Information used from ACCA covered ``residential and light commercial''
dealers, and was divided into new and retrofit services, with markups
of 1.41 and 1.63, respectively. The weighted average markup for ACCA
was 1.55 (based on 66 percent of all sales being retrofit sales), close
to the markup of 1.54 for one of the contractor consolidators. The
markup for the other consolidator was 1.38, but half of its revenues
come from plumbing, electrical, and other services that typically have
lower margins. A central value of 1.55 was chosen for the Price
Analysis, with a range of 1.37 (based on information from ICF
Consulting on equipment markups for direct replacement) to 1.63.
Sales Tax: In many cases, local and state sales taxes are applied
to equipment purchases. Using 1997 state and local sales tax data and
1994 state unitary shipment data, the Department calculated a
distribution of combined sales tax rates. Although the distribution
revealed a small percentage of consumers at tax rates of 0% and 10%,
the effective distribution was triangular with a mean of 6.7% and a
range from 5% to 8%. This corresponds to a mean markup of 1.07 with a
range from 1.05 to 1.08.
Overall Markup: Equipment purchase price is determined by
multiplying manufacturer cost and overall markup. Mean values and
ranges for the overall markup are the products of the mean values and
ranges for manufacturer markup, distributor markup, dealer markup and
sales tax. The mean overall markup is thus calculated as 2.68, with a
range of 2.27 to 3.04.
iii. Payback Analysis (Distribution of Paybacks)
Payback is calculated based on the same inputs used for the LCC
Analysis with the difference that the payback values are based on first
year savings achieved after the standard takes effect. The output of
the analysis is a distribution of payback periods. The mean payback
period is also reported. Additional information is available in the LCC
spreadsheet which is posted to the Department's web site. The data
includes charts of cash flow taking into account the changing annual
fuel prices.
iv. Rebuttable Payback
As discussed previously, EPCA established a rebuttable presumption
that a standard is economically justified if the additional product
purchase cost attributed to the standard is less than three times the
value of the first year energy cost savings, which is equivalent to a
three year simple payback. The calculation of rebuttable payback is
based on single point-values instead of probability distributions used
in the LCC analysis. For example, where a probability distribution of
electricity prices are used in the distributional Payback Analysis,
only the weighted-average value from the probability distribution of
electricity prices is used for the determination of the Rebuttable
payback.
Other than the use of single point-values, the most notable
difference between the two payback analyses is the Rebuttable payback's
reliance on the DOE test procedure to determine a central air
conditioner's or heat pump's annual energy consumption. The DOE test
procedure for central air conditioners and heat pumps in the cooling
season uses the following expression to calculate the annual space-
cooling energy consumption:
Space-Cooling Annual Energy Use = (Cooling Capacity SEER) x
Hours
where the Hours equal 1000, the assumed annual operational hours of the
space-cooling equipment.
The DOE test procedure for the heating season performance of heat
pumps uses the following expression to calculate the annual space-
heating energy consumption:
Space-Heating Annual Energy Use = (DHR HSPF) x 0.77 x
Hours
where DHR equals the design heating requirement (which for 3-ton
cooling capacity heat pumps is typically 35,000 Btu/hr) and Hours equal
2080, the assumed seasonal operational hours of the space-heating
equipment.
The annual space-cooling and heating energy consumption calculated
based on the previous equations from the DOE test procedure are on the
order of 50% greater than the weighted-average values from the 1993
RECS. This means that the payback value calculated from the DOE test
procedure equations will be significantly lower than the average
payback value calculated from the RECS analysis, for any standard
level.
Rebuttable payback periods are first calculated between the new
standard level being analyzed and each central air conditioner or heat
pump efficiency being sold in the year 2006. The paybacks are then
weighted and averaged according to the percentage of each equipment
efficiency sold before a new standard is enacted. Rather than being
based on probability distributions, single point values are used for
the input variables. These values (e.g., operating hours per year) will
correspond to those defined in the DOE
[[Page 66325]]
test procedure. The result is a single-value of payback and not a
probability distribution. The payback is calculated for the expected
effective year of the standard (e.g., 2006). Examples and further
details are presented in the Preliminary TSD.
Based on the most recently available shipments data from ARI (from
1994), Table 13 shows the markets shares by efficiency level for each
of the four product classes being analyzed.
Table 13.--Efficiency Level Market Shares
[In percent]
----------------------------------------------------------------------------------------------------------------
Single Single
SEER Split A/C Split HP package A/C package HP
----------------------------------------------------------------------------------------------------------------
10.............................................. 78.7 59.3 82.3 64.2
11.............................................. 5.4 15.0 9.7 13.6
12.............................................. 12.0 19.7 6.8 22.2
13.............................................. 3.6 4.5 1.2 0.0
14.............................................. 0.1 1.0 0.0 0.0
15.............................................. 0.2 0.5 0.0 0.0
----------------------------------------------------------------------------------------------------------------
Because the shipment-weighted efficiencies of unitary air conditioners
and heat pumps has remained essentially flat over the four year period
from 1994 to 1997, the previous market shares in Table 13 for 1994 are
assumed to be applicable for the year 2006. If available, data on a
forecasted distribution of equipment efficiencies in the year 2006 will
be used to refine these calculations for the NOPR Analysis.
2. Preliminary Results
a. General
Calculation of LCC captures the tradeoff between the increases in
purchase price and reductions in operating expenses for increasing
efficiencies of appliances. In addition, two other measures of economic
impact are calculated: distributions of payback periods and a payback
period calculated for purposes of the rebuttable presumption clause.
The outputs of the LCC spreadsheet include probability distributions
and single-point average values of the impacts for each energy
efficiency level compared to the baseline. A distinct advantage of
modeling based on probability distributions is that the percentage of
consumers achieving LCC savings or attaining certain payback periods
due to an increased efficiency standard can be identified. A variety of
graphic displays can illustrate the implications of the analysis
results. These include: (1) A cumulative probability distribution
showing the percentage of U.S. households that would have a net saving
by owning a more energy-efficient appliance, and (2) a chart depicting
the variation in LCC for each efficiency level considered.
b. Product Specific
The following LCC results show the mean LCCs associated with the
standard levels which were analyzed. In addition, the percent of
households with reduced LCCs relative to current minimum efficiency
equipment (10 SEER) are provided. LCC results are provided based upon
the manufacturer cost estimates from the efficiency-level approach
(section II C.1.b.i.) and the reverse engineering (section
II.C.1.b.ii.). LCC results are presented for nominal 3-ton capacities
for the four primary product classes, i.e., split-type air
conditioners, split-type heat pumps, single-package air conditioners,
and single-package heat pumps (See Tables 14 to 17). Since the values
of most inputs are uncertain and are represented by probability
distributions of values rather than discrete values, the results
presented in the Preliminary TSD (which describes the analytic results
in greater detail) are also described by probability distributions.
Table 14.--Split-Type Air Conditioners--LCC Results
----------------------------------------------------------------------------------------------------------------
Source of manufacturing cost data
---------------------------------------------------------------
Industry Reverse engineering
SEER ---------------------------------------------------------------
Percent with Percent with
Mean LCC lower LCC Mean LCC lower LCC
----------------------------------------------------------------------------------------------------------------
10.............................................. $4,837 .............. $4,828 ..............
11.............................................. 4,827 39 4,786 48
12.............................................. 4,886 31 4,770 45
13.............................................. 5,229 12 4,931 27
14.............................................. 5,659 6 5,246 15
15.............................................. 6,052 4 5,456 11
16.............................................. .............. 2 5,533 11
17.............................................. .............. .............. 5,672 10
----------------------------------------------------------------------------------------------------------------
[[Page 66326]]
Table 15.--Split-Type Heat Pumps--LCC Results
----------------------------------------------------------------------------------------------------------------
Source of manufacturing cost data
---------------------------------------------------------------
Industry Reverse engineering
SEER / HSPF ---------------------------------------------------------------
Percent with Percent with
Mean LCC lower LCC Mean LCC lower LLC
----------------------------------------------------------------------------------------------------------------
10 / 6.8........................................ $10,086 .............. $10,001 ..............
11 / 7.1........................................ 9,915 74 9,695 99
12 / 7.4........................................ 9,852 63 9,533 90
13 / 7.7........................................ 10,119 36 9,850 49
14 / 8.0........................................ 10,311 28 10,246 27
15 / 8.2........................................ 11,079 11 10,534 20
16 / 8.2........................................ .............. .............. 10,679 18
----------------------------------------------------------------------------------------------------------------
Table 16.--Single Package Air Conditioners--LCC Results
----------------------------------------------------------------------------------------------------------------
Source of manufacturing cost data
---------------------------------------------------------------
Industry Reverse engineering
SEER ---------------------------------------------------------------
Percent with Percent with
Mean LCC lower LCC Mean LCC lower LCC
----------------------------------------------------------------------------------------------------------------
10.............................................. $5,341 .............. $5,324 ..............
11.............................................. 5,429 20 ..............
12.............................................. 5,433 26 5,194 58
13.............................................. 6,031 5 5,598 17
14.............................................. 6,362 4 .............. ..............
15.............................................. 6,921 2 .............. ..............
----------------------------------------------------------------------------------------------------------------
Table 17.--Single Package Heat Pumps--LCC Results
----------------------------------------------------------------------------------------------------------------
Source of manufacturing cost data
---------------------------------------------------------------
Industry Reverse engineering
SEER ---------------------------------------------------------------
Percent with Percent with
Mean LCC lower LCC Mean LCC lower LCC
----------------------------------------------------------------------------------------------------------------
10 / 6.8........................................ $10,025 .............. $9,912 ..............
11 / 7.1........................................ 9,906 61 .............. ..............
12 / 7.4........................................ 9,835 58 9,551 80
13 / 7.7........................................ 10,342 22 .............. ..............
14 / 8.0........................................ 10,425 21 .............. ..............
15 / 8.2........................................ 11,031 10 .............. ..............
----------------------------------------------------------------------------------------------------------------
Tables 18 to 21 show the median payback periods associated with
each standard level. To note, the median value of a distribution has an
equal number of payback periods that are greater than and less than the
reported value. As with the LCC results, payback periods are provided
based upon both the manufacturer cost estimates from the industry and
from the reverse engineering analysis. Payback period results are
presented for the four primary product classes; split-type air
conditioners, split-type heat pumps, single-package air conditioners,
and single-package heat pumps.
Table 18.--Split-type Air Conditioners--Median Payback Periods
[In years]
------------------------------------------------------------------------
Source of manufacturing
cost data
SEER -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11............................................ 13 10
12............................................ 15 11
13............................................ 41 20
14............................................ 80 35
15............................................ 137 43
16............................................ ........... 46
17............................................ ........... 49
------------------------------------------------------------------------
Table 19.--Split-type Heat Pumps--Median Payback Periods
[In years]
------------------------------------------------------------------------
Source of manufacturing
cost data
-------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11/7.1........................................ 6 1
12/7.4........................................ 8 3
13/7.7........................................ 13 10
14/8.0........................................ 17 17
15/8.2........................................ 31 21
16/8.4........................................ ........... 22
------------------------------------------------------------------------
[[Page 66327]]
Table 20.--Single Package Air Conditioners--Median Payback Periods
[In years]
------------------------------------------------------------------------
Source of manufacturing
cost data
SEER -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11............................................ 20 ...........
12............................................ 17 8
13............................................ 84 30
14............................................ 133 ...........
15............................................ 559 ...........
------------------------------------------------------------------------
Table 21.--Single Package Heat Pumps--Median Payback Periods
[In years]
------------------------------------------------------------------------
Source of manufacturing
cost data
SEER/HSPF -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11/7.1........................................ 8 ...........
12/7.4........................................ 9 5
13/7.7........................................ 20 ...........
14/8.0........................................ 20 ...........
15/8.2........................................ 31 ...........
------------------------------------------------------------------------
Tables 22 to 25 show the simple paybacks for purposes of the
rebuttable presumption clause. This means test procedure assumptions
are followed for central air conditioners and heat pumps.
Table 22.--Split-Type Air Conditioners--Simple Payback
[In years]
------------------------------------------------------------------------
Source of manufacturing
cost data
SEER -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11............................................ 6.2 5.0
12............................................ 7.6 5.4
13............................................ 13.7 7.8
14............................................ 20.9 12.7
15............................................ 26.8 14.7
16............................................ ........... 14.6
17............................................ ........... 15.4
------------------------------------------------------------------------
Table 23.--Split-Type Heat Pumps--Simple Payback
[In years]
------------------------------------------------------------------------
Source of manufacturing
cost data
SEER/HSPF -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11/7.1........................................ 3.2 0.4
12/7.4........................................ 4.2 1.8
13/7.7........................................ 6.8 5.6
14/8.0........................................ 8.0 8.8
15/8.2........................................ 13.8 10.5
16/8.4........................................ ........... 10.8
------------------------------------------------------------------------
Table 24.--Single Package Air Conditioners--Simple Payback
[In years]
------------------------------------------------------------------------
Source of manufacturing
cost data
SEER -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11............................................ 9.9 ...........
12............................................ 8.5 3.8
13............................................ 21.2 11.2
14............................................ 25.2 ...........
15............................................ 35.8 ...........
------------------------------------------------------------------------
Table 25.--Single Package Heat Pumps--Simple Payback
[In years]
------------------------------------------------------------------------
Source of manufacturing
cost data
SEER/HSPF -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11/7.1........................................ 4.3 ...........
12/7.4........................................ 4.6 2.7
13/7.7........................................ 9.7 ...........
14/8.0........................................ 9.2 ...........
15/8.2........................................ 13.7 ...........
------------------------------------------------------------------------
E. Preliminary National Impacts Analyses
The National Impacts Analysis assesses the net present value (NPV)
of total consumer LCC, average consumer payback, NES, and indirect
employment impacts. Each of the above are determined for selected
standard levels. These calculations are done by the use of a
spreadsheet tool called the NES Spreadsheet Model, which has been
developed for all the standards rulemakings and tailored to each
specific appliance rulemaking. NES spreadsheets for central air
conditioners and heat pumps are posted to the Department's web site. A
preliminary assessment of the aggregate impacts at the national level
has been conducted for this Supplemental ANOPR.
Analyzing impacts of Federal energy-efficiency standards requires a
comparison of projected U.S. residential energy consumption without
standards (baseline case) and with standards. The baseline case
includes the mix of efficiencies of appliances being sold at the time
the standard becomes effective. The forecasts contain projections of
unit energy consumption of new appliances, annual appliance shipments,
and prices of purchased appliances. The differences between the
baseline and standards cases represent the energy and cost savings.
Depending on the method used for sales projections, the sales under a
standards case projection may differ from those of a baseline case
projection.
The Department calculated national energy consumption for each
year, beginning with the expected effective date of the standards, for
the base case and for each candidate standards level using two methods,
i.e., simple spreadsheets, and multiplication of shipment forecasts by
unit energy savings. Spreadsheets for shipments analysis are posted to
the Department's web site. Energy consumption and savings are estimated
based on site energy (kWh of electricity), then the electricity
consumption and savings are converted to source energy. The differences
in annual energy consumption between the base case and standards case
were aggregated to arrive at cumulative energy savings through the year
2030.
DOE agrees with the Advisory Committee's recommendation that the
assumption of a constant site to source-energy conversion factor should
be dropped in favor of a conversion factor that changes from year to
year. The conversion factor would be calculated for each year of the
analysis based on the generating capacity displaced and the amount of
site energy saved (see the following detailed procedure). For future
conversion factors, DOE proposes to use the following method:
(1) Start with an integrated projection of electricity supply and
demand (e.g., the National Energy Modeling System (NEMS) AEO reference
case), and extract the source energy consumption.
(2) Estimate projected energy savings due to possible standards for
each year (e.g., using the NES spreadsheet).
(3) Feed these energy savings back to NEMS as a new scenario,
specifically a deviation from the reference case, to obtain the
corresponding source energy consumption.
(4) Obtain the difference in source energy consumption between this
standard level scenario and the reference case.
(5) Divide the source energy savings in Btu, adjusted for class
specific transmission and distribution losses, by the site energy
savings in kilowatt-hours to provide the time series of conversion
factors in Btu per kilowatt-hour.
The resulting conversion factors will change over time, and will
account for the displacement of generating sources. Furthermore, the
NES spreadsheet models will include a clearly defined column of
conversion factors, one for each year of the projection. DOE and
stakeholders can examine the effects of alternative assumptions by
replacing this column of numbers.
[[Page 66328]]
1. National Energy Savings (NES) Spreadsheet Model
a. General
In order to make the analysis more accessible and transparent to
all stakeholders, the Department has previously prepared spreadsheet
models using Microsoft Excel in Windows 95 for other appliances to
forecast energy savings and to demonstrate how improvements in
efficiency can be accounted for over time. These models, the NES
spreadsheets, are specific applications of a common model structure to
each appliance, and a model was tailored to the case of central air
conditioners and another for the case of heat pumps. These same NES
spreadsheets were also used to forecast net present value (NPV). These
spreadsheets are posted to the Department's web site.
The NES spreadsheets are used to calculate the NES, and the
national economic costs and savings from new standards. Input
quantities can be changed within the spreadsheet. Unlike the LCC
Analysis, the NES Spreadsheet does not use probability distributions
for inputs or outputs. Both EEI and OOE stated that the NES Analysis
should use a range of values rather than single point-values.
Specifically, EEI stated that a range of equipment costs should be used
to determine NES and net present values while OOE presumes that
distributional inputs will be used to depict regional differences.
(EEI, #2; OOE, #7) In order to address these concerns, the Department
will conduct sensitivity analyses as needed for the NOPR Analysis by
running scenarios on the input variables of interest.
One of the more important components of any estimate of the impact
of future standards is shipments. Forecasts of shipments for the base
case and the standards case need to be obtained as an input to the NES.
The Department developed a base case forecast of product shipments in
the absence of new standards. For all candidate standards levels,
shipment forecasts are needed to calculate the national benefits of
standards and to calculate the future cash flows of manufacturers.
There are a variety of methods available for projecting shipments. A
sophisticated accounting model was used by the Department and run to
determine shipment scenarios for each energy efficiency level.
Other quantities in the NES spreadsheet are: energy price
projections, including an analysis of consumer marginal electricity
rates (See Section II.D.1.a); effective date of the standard (start
year); discount rate and the year of the NPV (1999); manufacturing
cost; total installed cost; baseline energy use; lifetime; and the
conversion factor from site to source energy.
An industry representative requested that the impact of existing
minimum efficiency standards be calculated in order to determine
whether the existing standards are indeed cost-effective. (David Lewis,
Lennox International, Transcript, pp 313) The Department has not made
any attempt to determine the cost-effectiveness of the existing minimum
efficiency standards. The Department believes that such an analysis
would not materially contribute to a decision whether to adopt a more
stringent standard. Rather, the energy savings and NPV are calculated
from the expected date any new standard level would take effect to the
year 2030. Both individual year and cumulative data are generated.
Output charts and tables provide cumulative energy savings, the cost
and savings per year (in a chart), and the cost and NPV due to
standards.
b. Product Specific
i. Inputs to NES Analysis
Table 26 summarizes the inputs used in the NES model. The NES model
uses the same basic data as the LCC model for energy use and cost of
equipment, except that shipment weighted-average values (based on the
shipment and energy-efficiency distribution forecasts) are used instead
of distributions. As with the LCC Analysis, two sets of results,
including forecasts of shipments, energy savings, and net present value
(NPV), were calculated based on two different sets of costs (industry
data and reverse engineering) associated with increasing efficiency.
Table 26.--Summary of NES Model Inputs
------------------------------------------------------------------------
Parameter Data description
------------------------------------------------------------------------
Shipments......................................... Output from Shipment
Model.
Total installed Consumer Cost..................... Average value for
the baseline and
each standard
level. From LCC
Analysis.
Repair and Maintenance Costs...................... Average values for
the baseline and
each standard
level. From LCC
Analysis.
Historical Efficiencies........................... Shipment-weighted
efficiency data
(SEER) from the Air-
Conditioning and
Refrigeration
Institute for the
years 1976-1997.
Future Efficiency Trend........................... For the years 1998
to the assumed
effective date of
the new standard
(2006), shipment-
weighted
efficiencies are
assumed to remain
constant at the
shipment-weighed
efficiency level in
1997. For years
beyond the assumed
effective date of
the new standard,
shipment-weighted
efficiencies are
assumed to equal
the new standard
level.
Unit Annual Energy Consumption.................... Based on the
weighted-average
annual energy
consumption and
efficiency from LCC
Analysis. To
estimate the
representative
annual energy
consumption of a
central air
conditioner or heat
pump for any given
year, the ratio of
the RECS weighted-
average efficiency
to the efficiency
level in that year
is multiplied by
the RECS weighted-
average annual
energy consumption.
Electricity Prices................................ Based on the
weighted-average
marginal
electricity price
determined from
RECS93 in the LCC
Analysis.
Escalation of Electricity Prices.................. 1999 EIA AEO
forecasts (to 2020)
and extrapolation
from 2020 to 2030.
Electricity Site-to-Source Conversion............. Conversion varies
yearly and is
provided by the
1999 Annual Energy
Outlook (a time
series conversion
factor; includes
electric generation
transmission and
distribution
losses).
Discount Rate..................................... 7% real.
Present Year...................................... Future expenses are
discounted to year
1999.
------------------------------------------------------------------------
Both EEI and EMPA provided comments on the type of electricity
price that should be used in the analysis. EEI warned that energy
savings will decrease as a result of dropping energy prices, and that
the 1998 AEO electricity price forecasts do not decline rapidly enough,
since factors resulting from deregulation are not accounted for. Both
EEI and EMPA stated that marginal rather than average electricity
prices should be used in all calculations. (EEI, #2; EMPA, #3) As noted
in Table 26 and as discussed earlier in the LCC Analysis (section II
D.1.b.i.), the Department used
[[Page 66329]]
the most recent forecasts from the 1999 AEO to predict the trend in
both average and marginal electricity prices. In addition, the NES
spreadsheets can be run with price forecasts from the GRI. The
Department believes these forecasts are the most reliable available to
predict future energy trends. With regard to marginal energy prices,
the Department is using mean marginal prices to calculate energy
savings.
EEI also warned that energy savings from higher SEERs could be
lower in hot and humid climatic regions, where EER is a better
indicator of equipment performance. (EEI, #2) Although the performance
of equipment can vary depending on climatic conditions, the Department
believes that SEER will provide the best indicator of annual energy use
in all climates. The annual energy consumption values from the 1993
RECS, which the NES spreadsheet uses as the basis for determining the
energy savings from higher SEER standards, accounts for regional
variations in energy use.
EEI stated that diversity factors must be taken into account when
calculating NES, as not all air conditioners are on at the same time.
Utility load factors should also be addressed. (Steve Rosenstock, EEI,
Transcript, p 272; EEI, #2). Diversity and utility load factors are not
accounted for in the determination of NES. Rather, the NES are passed
through to the Utility Impact Analysis which will establish the impacts
of the savings on utility generation and distribution. The model to be
used in the Utility Analysis (NEMS-BRS) accounts for diversity and
utility load factors when determining the impacts on the utility
industry. NEMS-BRS is a variant of U.S. DOE/EIA's NEMS and is named as
such for two reasons: (1) The Utility Analysis to be performed entails
some minor code modifications and (2) the model will be run under
various policy scenarios that will be variations on DOE/EIA
assumptions. The name NEMS-BRS refers to the model to be used for the
Utility Analysis (BRS is DOE's Building Research and Standards office).
NEMS was used by DOE/EIA to produce the 1999 AEO, and NEMS-BRS is used
to provide some key equivalent inputs to the standards analysis.
ii. Shipments Model
The Department chose an accounting model method to prepare shipment
scenarios for baseline (10 SEER) and five standard levels (11 through
15 SEER) for central air conditioners and heat pumps. The model tracks
the stocks and purchases of each type of central air conditioner and
heat pump. Events and consumer decisions influence how the stock and
supply of central air conditioner and heat pump systems flow from one
category to another. Decisions that are economically influenced are
modeled with econometric equations.
OOE supports the use of the accounting method for forecasting
shipments, but stated that thorough discussions will be required in
order to quantify the impacts of non-regulatory programs and market
trends. (OOE, #7) The Department reviewed information from parties
involved in market-based initiatives for increasing the sales of high-
efficiency models but was unable to determine any quantifiable measure
of how these programs impact product efficiencies on a national basis.
Thus, the impact of market-based initiatives was not incorporated into
the baseline and standard level forecasts.
The model is organized into three classes of elements: Stocks,
events, and decisions. Stocks of central air conditioners and heat
pumps are divided into ownership categories, and units are assigned to
age categories. Events are things that happen to stocks independent of
economic conditions, i.e., breakdowns requiring repair or replacement.
Decisions are consumer reactions to market conditions, e.g., whether to
repair or replace equipment, or to buy a house with or without an air
conditioner or heat pump. Consumer purchase decisions are categorized
by market segments. Decision trees are used to describe consumer
choices for purchases and repairs. A logit probability model simulates
consumer purchase decisions that are based on equipment price,
operating costs, and income level.
Ownership Categories: Households are first divided into central air
conditioner and heat pump markets, then the two markets are further
divided into four different ownership categories, including (1) new
housing, (2) existing housing with a regular central air conditioner or
heat pump (i.e., equipment has not been repaired to extend its life),
(3) housing without a central air conditioner or heat pump, and (4)
housing with an extended life central air conditioner or heat pump
(i.e., equipment repaired to extend its life). The population of
central air conditioner and heat pump units in each ownership category
are referred to as the stock of central air conditioner and heat pump
units of that category. Accounting equations relate annual changes in
stocks to activities in the various market segments.
Market Segments: Central air conditioner and heat pump purchases
are divided into five market segments:
Net New Housing Market: Net increase in the housing stock
forces the purchase of new central air conditioner and heat pump
systems.
Early (Discretionary) Replacement Market: About 29% of
central air conditioner and heat pump owners replace the existing
systems before the systems break down because they want an updated
model, because of remodeling, or for other miscellaneous reasons.
Regular Replacement Market: Most central air conditioner
and heat pump purchases are to replace an existing system that has
broken down after completion of its useful life.
Extra Repair Market: Since replacement of central air
conditioner and heat pump systems is costly, a few consumers will
rebuild or repair a malfunctioning system (thus extending its lifetime)
rather than purchasing a new system. Eventually, even extended-life
central air conditioner and heat pump systems are replaced.
Homes without an air conditioner or heat pump system: A
few households without a central air conditioner or heat pump system
will purchase them and become new central air conditioner or heat pump
owners.
Events and decisions (e.g., the probability that an existing
central air conditioner has a problem and the course of action taken by
the consumer) are modeled separately for each market segment.
Logit Probability Model: The logit probability of purchase model is
used to estimate the impact of standards-induced price and features
changes on consumer decisions. The model accounts for consumer
responsiveness to purchase price, operating costs, and income.
Coefficients for the responsiveness to these three factors were
developed for each of the market segments, based on the results of
empirical research on consumer purchase behavior. The probabilities are
applied to equations that govern activities in the various market
segments.
Table 27 summarizes the various inputs and sources of the central
air conditioner and heat pump shipment model.
[[Page 66330]]
Table 27.--Summary of Shipment Model Inputs
------------------------------------------------------------------------
Data description/
Parameter source
------------------------------------------------------------------------
Data for New Housing Starts....................... Census Bureau data
on new housing
construction.
Data for Early Replacement Market................. 1990 ASHRAE
technical paper
entitled ``Heat
Pump Life and
Compressor
Longevity in
Diverse Climates''.
In the paper, 29%
of consumers in
1987 replaced their
equipment for
reasons other than
unit failure.
Data for Regular Replacement Market............... 1990 ASHRAE
technical paper
entitled ``Heat
Pump Life and
Compressor
Longevity in
Diverse Climates''.
Survival functions
for total system
life and original
compressor life are
presented. The
compressor survival
function was used
to establish the
probability that a
system has problems
while the
difference between
the two survival
functions was used
to establish the
probability of
repair vs.
replacement.
Data for Extra Repair Market...................... 1990 ASHRAE
technical paper
entitled ``Heat
Pump Life and
Compressor
Longevity in
Diverse Climates''.
Total system
survival function
was used establish
the probability of
extended or extra
repair.
Data for Homes without an air conditioner or heat March 29, 1993 issue
pump. of the Air-
Conditioning,
Heating and
Refrigeration News.
In 1992, 14% of
central air
conditioner and
heat pump shipments
went to non-owner
households.
Elasticities...................................... Purchase Price,
Operating cost, and
Income
elasticities--from
The ORNL
Engineering-
Economic Model of
Residential Energy
Use, Oak Ridge
National
Laboratory, 1978.
Source of Household Income........................ EIA, 1999 AEO.
------------------------------------------------------------------------
This shipments model allows appliance saturations to be expressed
as a function of consumer price and operating cost in order to capture
the effect of those two variables on future shipments. The Department
prepared consumer price and operating cost elasticities to calibrate
appliance forecasts to historical shipments. These and other features
of the model allow it to provide estimates that are consistent with the
recent history of central air conditioner and heat pump shipments,
market structure, and consumer preferences.
Drawbacks of this method include: (1) Saturation of units in new
and stock households must be forecasted, (2) housing starts must be
forecasted (although the AEO does provide readily available forecasts),
and (3) retirement of units must be based upon assumptions regarding
lifetimes.
Unlike the LCC model, the shipments model does not use probability
distributions of values for inputs. While the shipment models uses the
same basic input data as the LCC model for energy use and cost of
equipment, the model uses shipment weighted-average values instead of
probability distributions.
Because NES are dependent on shipments (which, in turn, are
dependent on equipment purchase price), the Department prepared two
sets of shipments forecasts, one based on manufacturer cost data for
increases in efficiency levels and the other based on cost data from
the reverse engineering methodology, both of which are presented in the
Preliminary TSD.
iii. National Net Present Value
Net present value (NPV) is the sum over time of discounted net
savings. The national NPV of each candidate standards level is the
difference between the base case national average LCC and the national
average LCC in the standards case.
Using the NES model, NPV was calculated from projections of
national expenditures for central air conditioners and heat pumps,
including total installed consumer cost and operating expenses. Future
costs and savings were discounted to the present with a discount
factor, which was calculated from the discount rate and the number of
years between the present (year to which the sum is being discounted)
and the year in which the costs and savings occur.
The inputs for the determination of national NPV were detailed in
the discussion of the NES model. Like the NES results, two sets of NPV
results were prepared; one based on industry-provided manufacturer
costs and the other on the reverse engineering data.
2. Preliminary Results
a. General
The Department calculated the national energy consumption by
multiplying the number of central air conditioners and heat pumps (by
vintage) by the unit energy consumption (also by vintage). Vintage is
the age of the equipment (varying from one to twenty four-years).
National annual energy savings is the difference between national
energy consumption at the base case (without new standards) and each
standards case. Cumulative energy savings are the sum of the annual NES
over several time periods (e.g., 2006-2010, 2006-2020, and 2006-2030).
National economic impacts are calculated from the energy savings.
The primary metric for measuring national economic impact is NPV. The
NPV can be expressed by the following equation:
NPV = PVS-PVC
Where PVS equals the present value of operating cost savings (including
electricity, repair, and maintenance cost savings) and PVC equals the
present value of increased equipment costs (including equipment price
and installation price). Another way of describing NPV is that it is
the difference between the LCCs (for all appliances sold) with and
without standards.
In NPV, costs are calculated as the product of (1) the difference
in the purchase price between the base case and standards case and (2)
the annual sales volume in the standards case. Since costs of the more-
efficient equipment purchased in the standards case are higher than
those of equipment purchased in the base case, price increases appear
as negative values in the NPV.
Monetary savings are typically exhibited as decreases in operating
costs associated with the higher energy efficiency of appliances
purchased in the standards case compared to the base case. Total
operating cost savings is the product of savings per unit and the
number of units of each vintage surviving in a particular year. Savings
appear as positive values in the NPV.
Net savings each year are calculated as the difference between
Total Operating Cost Savings and Total Equipment Costs. The savings are
calculated over the life of the appliance, accounting for the
differences in yearly energy rates. Future annual costs and savings are
discounted to the present time and summed. NPV greater than zero
indicates net savings (i.e., that the standard reduces consumer
expenditures in the standards case relative to the base case). NPV less
than
[[Page 66331]]
zero indicates that the standard incurs net costs.
The elements of the NPV can be expressed in another form, as the
benefit/cost ratio. The benefit is the savings in decreased operating
expenses (including electricity, repair, and maintenance), while the
cost is the increase in the purchase price (including equipment and
installation price) due to standards relative to the base case. When
the NPV is greater than zero, the benefit/cost ratio is greater than
one.
b. Product Specific
Tables 28 to 31 show the forecasted NES for the four primary
product classes at each of the five efficiency levels analyzed (11
through 15 SEER). The results shown are based on a single shipment
weighted average (SWA) cost instead of a cost distribution.
Table 28.--Split-Type Air Conditioners: Cumulative NES Impacts From 2006
to 2030
[Quads]
------------------------------------------------------------------------
Source of manufacturer
cost data
SEER -------------------------
Reverse
Industry Engineering
------------------------------------------------------------------------
Base Case \1\................................. 24.3 24.3
11............................................ 0.7 0.7
12............................................ 2.6 2.5
13............................................ 4.3 4.1
14............................................ 5.8 5.6
15............................................ 7.0 6.7
------------------------------------------------------------------------
\1\ Values for Base Case are the cumulative national energy consumption
from 2006 to 2030.
Table 29.--Split-Type Heat Pumps: Cumulative NES Impacts From 2006 to
2030
[Quads]
------------------------------------------------------------------------
Source of manufacturer
cost data
SEER/HSPF -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
Base Case \1\................................. 27.8 27.8
11/7.1........................................ 0.1 0.0
12/7.4........................................ 1.3 1.1
13/7.7........................................ 2.9 2.8
14/8.0........................................ 4.3 4.4
15/8.2........................................ 5.8 5.6
------------------------------------------------------------------------
\1\ Values for Base Case are the cumulative national energy consumption
from 2006 to 2030.
Table 30.--Single Package Air Conditioners: Cumulative NES Impacts From
2006 to 2030
[Quads]
------------------------------------------------------------------------
Source of manufacturer
cost data
SEER -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
Base Case \1\................................. 3.8 3.8
11............................................ 0.1 ...........
12............................................ 0.4 0.4
13............................................ 0.7 0.7
14............................................ 0.9 ...........
15............................................ 1.1 ...........
------------------------------------------------------------------------
\1\ Values for Base Case are the cumulative national energy consumption
from 2006 to 2030.
Table 31.--Single Package Heat Pumps: Cumulative NES Impacts From 2006
to 2030
[Quads]
------------------------------------------------------------------------
Source of manufacturer
cost data
SEER/HSPF -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
Base Case \1\................................. 4.7 4.7
11/7.1........................................ 0.0 ...........
12/7.4........................................ 0.2 0.2
13/7.7........................................ 0.5 ...........
14/8.0........................................ 0.7 ...........
15/8.2........................................ 1.0 ...........
------------------------------------------------------------------------
\1\ Values for Base Case are the cumulative national energy consumption
from 2006 to 2030.
Tables 32 to 35 show the national NPVs for the four primary product
classes at each of the five efficiency levels analyzed (11 through 15
SEER).
Table 32.--Split-Type Air Conditioners: Cumulative Net Present Value
Impacts From 2006 to 2030
[In billions of 1998 dollars]
------------------------------------------------------------------------
Source of manufacturer
cost data
SEER -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11............................................ -0.3 0.1
12............................................ -2.8 -0.1
13............................................ -7.5 -1.8
14............................................ -156 -8.4
15............................................ -22.0 -12.1
------------------------------------------------------------------------
Table 33.--Split-type Heat Pumps: Cumulative Net Present Value Impacts
From 2006 to 2030
[In billions of 1998 dollars]
------------------------------------------------------------------------
Source of manufacturer
cost data
SEER/HSPF ---------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11/7.1...................................... 0.0 0.1
12/7.4...................................... -0.6 0.5
13/7.7...................................... -1.6 -1.5
14/8.0...................................... -2.8 -4.3
15/8.2...................................... -8.1 -6.2
------------------------------------------------------------------------
Table 34.--Single Package Air Conditioners: Cumulative Net Present Value
Impacts From 2006 to 2030
[In billions of 1998 dollars]
------------------------------------------------------------------------
Source of manufacturer
cost data
SEER ---------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11.......................................... -0.2
12.......................................... -0.3 0.2
13.......................................... -1.9 -1.0
14.......................................... -2.8
15.......................................... -4.3
------------------------------------------------------------------------
Table 35.--Single Package Heat Pumps: Cumulative Net Present Value
Impacts From 2006 to 2030
[In billions of 1998 dollars]
------------------------------------------------------------------------
Source of manufacturer
cost data
SEER/HSPF ---------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11/7.1...................................... 0.0
12/7.4...................................... -0.1 0.1
13/7.7...................................... -0.6
14/8.0...................................... -0.6
15/8.2...................................... -1.3
------------------------------------------------------------------------
3. Indirect Employment Impacts
a. General
The July 1996 Process Rule includes employment impacts among the
factors to be considered in selecting a proposed standard. The Process
Rule states a presumption against any proposed standard level that
would cause significant plant closures or losses of domestic
employment.
The Department estimates the impacts of standards on employment for
appliance manufacturers, relevant service industries, energy suppliers,
and the economy in general. Employment impacts are separated into
indirect and direct impacts. Direct employment
[[Page 66332]]
impacts would result if standards lead to a change in the number of
employees at manufacturing plants and related supply and service firms.
Direct impacts are estimated in the Manufacturer Sub-Group Analysis
(section G.2).
Indirect impacts are impacts on the national economy other than in
the manufacturing sector being regulated. Indirect impacts may result
from both expenditures shifting among goods (substitution effect), and
income changing, which will lead to a change in overall expenditure
levels (income effect). Indirect employment impacts from standards are
defined as net jobs eliminated or created in the general economy as a
consequence of increased spending on the purchase price of appliances
and reduced household spending on energy.
New appliance standards are expected to increase the purchase price
of appliances (retail price plus sales tax, and installation). The same
standards are also expected to decrease energy consumption, and
therefore reduce household expenditures for energy. Over time, the
increased purchase price is paid back through energy savings. The
savings in energy expenditures may be spent on other items. Using an
input/output model of the U.S. economy, this analysis seeks to estimate
the effects on different sectors, and the net impact on jobs. National
impacts will be estimated for major sectors of the U.S. economy in the
NOPR. Public and commercially available data sources and software will
be utilized to estimate employment impacts. At least three scenarios
will be analyzed to bound the range of uncertainty in future energy
prices. All methods and documentation will be made available for
review.
b. Product Specific
The Department of Energy's Office of Building Technologies and
State Programs (BTS) has developed a spreadsheet model (IMBUILD) that
could be used to analyze indirect employment impacts. IMBUILD is a
special-purpose version of the Impact Analysis for Planning (IMPLAN)
national input-output model which specifically estimates the employment
and income effects of building energy technologies. IMPLAN was
developed originally by the U.S. Forest Service in cooperation with the
Federal Emergency Management Agency (FEMA) and the Bureau of Land
Management (BLM) to assist the Forest Service in land and resource
management planning. IMBUILD is an economic analysis system that
focuses on those sectors most relevant to buildings, and characterizes
the interconnections among 35 sectors as national input-output
matrices. The IMBUILD output includes employment, industry output, and
wage income. Changes in expenditures due to appliance standards can be
introduced to IMBUILD as perturbations to existing economic flows and
the resulting net national impact on jobs by sector can be estimated.
Additional detail is provided in the Preliminary TSD.
OOE stated that they are not familiar with this type of analysis
and believe that DOE should utilize specialists that may exist at the
Department of Commerce or the Department of Labor. (OOE, #7) The
Department intends to use IMBUILD in its analysis of indirect
employment impacts due to its relatively long history of being used as
a tool (in its original form as IMPLAN) for assessing economic impacts.
Although neither the Departments of Commerce or Labor were involved in
the development of IMPLAN, the model was based on use of the Commerce
Department's make-and-use tables, input-output model of the U.S.
economy, and price deflators; and use of the Labor Department's
schedule of wages. Consequently, DOE believes IMBUILD is a sound method
for analyzing indirect employment impacts. IMBUILD, in its original
form as IMPLAN, has been used since 1979 by a wide variety of
government and private agencies including FEMA and BLM in conducting
economic impact analyses.
F. Consumer Analyses
The Consumer Analysis evaluates impacts on any identifiable groups,
such as consumers of different income levels, who may be
disproportionately affected by any national energy efficiency standard
level.
The Department plans to evaluate variations in regional energy
prices, variations in energy use and variations in installation costs
that might affect the NPV of a standard to consumer sub-populations. To
the extent possible, the Department will obtain estimates of the
variability of each input parameter and consider this variability in
its calculation of consumer impacts. The analysis is structured to
answer questions such as: How many households are better off with
standards and by how much? How many households are not better off and
by how much? The variability in each input parameter and likely sources
of information will be discussed with stakeholders.
Variations in energy use for a particular appliance depend on
factors such as climate, type of household, and people in household.
Annual energy use can be estimated by a calculation based on an
accepted test procedure or it can be measured directly in the field.
The Department plans to perform sensitivity analyses to consider how
differences in energy use will affect sub-groups of consumers.
The impact on consumer sub-groups will be determined using the LCC
spreadsheet model. Details of this model are explained in the LCC
section of the Preliminary TSD.
1. Consumer Sub-Group Analysis
a. General
The Department will be sensitive to increases in the purchase price
to avoid negative impacts to identifiable population groups, such as
consumers of lower income levels. Additionally, the Department will
assess the likely impacts of an increased purchase price on product
sales and fuel switching.
b. Product Specific
For consumers, one measure of economic impact is the first cost of
the product. The Department will analyze first costs to determine their
impacts on consumer subgroups. The Department will be especially
attentive to the need to avoid negative impacts on population groups
such as low-income households. Increased first costs to consumers
resulting from standards are especially important for lower-income
consumers, since this group is most sensitive to price increases. For
lower-income consumers, increases in first costs for a product can
preclude the purchase of a new model of that product. As a result, some
consumers may retain products past their useful life, or purchase
older, used appliances. These older products are generally less
efficient, and their efficiency may deteriorate if they are retained
beyond their useful life. Increases in first cost can also preclude the
purchase and use of a product altogether resulting in a potentially
large loss of utility.
OOE commented that with regard to first-cost increases on low-
income households, the number of low-income households affected by any
new standards should first be determined (OOE, #7). The Department
seeks input on identifying the potential impacts of a large first-cost
increase on consumers (affordability, financing, and on other financial
issues), and on methods and data the Department could use in conducting
its analysis. The Department also seeks input on methods the Department
might use to assess the likely impacts of first-cost increases on
product sales and fuel switching.
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2. Consumer Participation
a. General
The Department seeks to inform and involve consumers and consumer
representatives in the process of developing standards. This includes
notification of consumer representatives during the rulemaking process
and where appropriate, seeking direct consumer input.
For all products, consumer input is important for several related
but separate analytical tasks. First, consumer preferences should be
understood prior to determining product classes in order to preserve
product utility. Second, assessing the impact of changes in first cost
may require direct consumer participation from affected consumer sub-
groups (particularly low-income households). Finally, consumer input is
useful to ensure that life-cycle costs are accurately estimated for
relevant subgroups of consumers. To assess consumer impacts, the
Department usually combines life-cycle cost modeling and direct
consumer input.
The advisory committee sub-group on consumer issues has suggested
appropriate means of obtaining consumer input, including: (1) Using
focus groups, (2) conducting surveys, (3) conducting demonstration
projects, (4) conducting marketing analysis, and, (5) researching
existing literature from voluntary programs. In seeking this
information, the advisory committee sub-group emphasized the need for
the Department to obtain information from statistically significant
sample sizes of all relevant consumer categories.
b. Product Specific
OOE recommended that the Department first investigate the actual
level of consumer input or choice involved in the purchase of these
systems before spending any time putting resources into surveying
consumers about first cost increases. (OOE, #7) OOE warned that HVAC
contractors, rather than consumers, may have greater decision-making
power regarding the purchase of systems.
G. Manufacturer Impact Analysis
The Manufacturer Impact Analysis estimates the financial impact of
standards on manufacturers and calculates impacts on competition,
employment, and manufacturing capacity.
Prior to initiating the detailed Manufacturing Impact Analysis, the
Department will prepare an approach document and have it available for
review. While the general framework will serve as a guide, the
Department intends to tailor the methodology for each rule on the basis
of stakeholder comments. The document will outline procedural steps and
outline issues for consideration. Three important elements of the
approach consist of the preparation of an industry cash flow, the
development of a process to consider sub-group cash flow, and the
design of an guide to interview manufacturers and others in gathering
information.
The policies outlined in the Process Rule required substantial
revisions to the analytical framework to be used in performing
Manufacturer Impact Analysis for each rulemaking. In the approach
document, the Department will describe and obtain comments on the
methodology to be used in performing the manufacturer impact analyses.
The manufacturer impact analyses will be conducted in three phases.
Phase 1 consists of two activities, namely, preparation of an industry
characterization and identification of issues. Phase 2 has as its focus
the larger industry, and in this phase, the GRIM will be used to
perform an Industry Cash Flow Analysis. Phase 3 involves repeating the
process described in Phase 2 (the Industry Cash Flow Analysis) but on
different sub-groups of manufacturers. Phase 3 also entails determining
additional impacts on competition, employment, and manufacturing
capacity.
1. Industry Characterization (Phase 1)
a. General
Phase 1 of the Manufacturer Impact Analysis consists of collecting
pertinent financial and market information. This activity involves both
quantitative and qualitative efforts. Data gathered will include market
share, corporate operating ratios, wages, employment, and production
cost ratios. These data are incorporated into the Engineering Analysis
in the estimation of equipment production costs and distribution
markups. Sources of information include reports published by industry
groups, trade journals, and the U.S. Bureau of Census, and copies of
SEC 10-K filings.
b. Product Specific
The Department collected central air conditioner manufacturer
information to support the Engineering Analysis. This included
manufacturer market shares, markups along the distribution chain, and
typical ratios for labor, materials, and overhead. This information
appears throughout the Preliminary TSD that accompanies this
Supplemental ANOPR.
2. Industry Cash Flow (Phase 2)
a. General
A change in standards affects the analysis in three distinct ways.
Standards at higher levels will require additional investment, will
raise production costs, and will affect revenue through higher prices
and, possibly, lower quantities sold. The Department will quantify
these changes by performing an Industry Cash Flow Analysis using the
GRIM. Usually this analysis will use manufacturing costs, shipments
forecasts, and price forecasts developed for the other analyses.
Financial information, also required as an input to GRIM, will be
developed based on publicly available data and confidentially submitted
manufacturer information.
The GRIM Analysis uses a number of factors: Annual expected
revenues; manufacturer costs such as cost of sales, selling and general
administration costs; taxes; and capital expenditures related to
depreciation, new standards, and maintenance, to arrive at a series of
annual cash flows beginning from before implementation of standards and
continuing explicitly for several years after implementation. The
measure of industry net present values are calculated by discounting
the annual cash flows from the period before implementation of
standards to some future point in time. The Preliminary TSD describes
the GRIM's operating principles.
b. Product Specific
The Industry Cash Flow Analysis uses average manufacturing costs
(with uncertainty) as described in the Engineering Analysis (section
II.C.2), shipments forecasts as described in the Preliminary National
Impact Analysis (section II.E.1), and price forecasts as described in
the LCC and Payback Analysis (section II.D.1.) Financial information,
also required as an input to the GRIM, is based on publicly available
data and confidentially submitted manufacturer information. The cash
flow analysis will be distributed to interested parties prior to the
workshop to be held after publication of this Supplemental ANOPR.
In Phase 2, the Department intends to expand the Phase 1 analysis
to include a Cash Flow Analysis covering, in aggregate, the firms that
manufacture residential central air conditioning equipment. The data
gathered in Phase 1 will be augmented with data from additional public
and private sources.
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These include shipment projections developed for the NES Analysis and
interviews with individual manufacturers. The GRIM will estimate the
potential effects of new standards on industry cash flow, net present
value, capacity, and employment. Scenarios will include both HCFC-22
and hydro-fluoro-carbon (HFC) refrigerants, HFC-410A. Other
considerations include imports and exports, uncertainty, and cumulative
regulatory burden.
An industry representative stated that his company would be very
unlikely to provide proprietary cost data directly to DOE or its
contractors. (Jim Crawford, Trane, Transcript, p 134). The Oregon
Office of Energy (OOE) warned that an Industry Cash Flow Analysis
should be internally consistent with data used in other analyses (OOE,
#7). The Department currently is seeking further input from
stakeholders on whether additional scenarios are needed, and on the
general appropriateness of the data sources and methods.
3. Manufacturer Sub-Group Analysis (Phase 3)
a. General
Assessment of impacts on sub-groups of manufacturers is Phase 3 of
the Manufacturing Impact Analysis. Using industry ``average'' cost
values is not adequate for assessing the variation in impacts among
sub-groups of manufacturers. Smaller manufacturers, niche manufacturers
or manufacturers exhibiting a cost structure largely different from
industry averages could be more negatively affected. Ideally, the
Department would consider the impact on every firm individually. In
highly concentrated industries this may be possible. In industries
having numerous participants, the Department will use the results of
the industry characterization to group manufacturers exhibiting similar
characteristics. The financial analysis of the ``prototypical'' firm
performed in the Phase 2 industry analysis can serve as a benchmark
against which manufacturer sub-groups can be analyzed.
The manufacturing cost data collected for the Engineering Analysis
will be used to the extent practical in the sub-group impact analysis.
To be useful, however, this data should be disaggregated to reflect the
variability in costs between relevant sub-groups of firms.
The Department will conduct detailed interviews with as many
manufacturers as is possible to gain insight into the potential impacts
of standards. During these interviews, the Department will solicit the
information necessary to evaluate cash flows and to assess competitive,
employment and capacity impacts. Firm-specific cumulative burden will
also be considered.
b. Product Specific
In order to conduct a Manufacturer Sub-Group Analysis, it will be
necessary to define representative sub-groups and conduct separate Cash
Flow Analysis for each. For example, one option consists of conducting
separate cash flows for all manufacturers. Another option, could entail
conducting Cash flow Analysis only for those manufacturers which
believe their impacts are more severe then industry average.
The Department intends to examine two sub-groups: high-volume
manufacturers and low-volume manufacturers. A ``strawman'' GRIM
Analysis on each subgroup will be prepared for review prior to the
interviews. Information from the interviews will be used to develop
revised GRIM sub-group analyses for consideration in the NOPR.
OOE recommended that the analysis use the minimum number of sub-
groups required to fully capture different levels of impact on
different sizes and type of manufacturers (OOE, #7).
The Department seeks input from stakeholders on whether the defined
sub-groups are appropriate, or whether fewer, or additional, subgroups
are needed. Comments are also requested regarding the value in grouping
manufacturers into sub-groups, compared to conducting individual GRIM
Analysis for each manufacturer. Additional commentary is sought
regarding which manufacturers should be asked to participate in the
interviews, and, more generally, what a well executed sub-group
analysis would entail.
4. Interview Process
a. General
The revised rulemaking process provides for greater public input
and for improved analytical approaches, with particular emphasis on
earlier and more extensive information gathering from interested
parties. The proposed three-phase Manufacturer Impact Analysis process
will draw on multiple information sources, including structured
interviews with manufacturers and a broad cross-section of interested
parties. Interviews may be conducted in any and all phases of the
analyses as determined in Phase 1.
The interview process has a key role in the manufacturer impact
analyses, since it provides an opportunity for manufacturers to
privately express their views on important issues. A key characteristic
of the interview process is that it is designed to allow confidential
information to be considered in the rulemaking process.
The initial industry characterization will collect information from
relevant industry and market publications, industry trade
organizations, company financial reports, and product literature. This
information will aid in the development of detailed and focused
questionnaires, as needed, to perform all phases of the manufacturer
impact analyses. It is the intention of the Department that the
contents of questionnaires and the list of interview participants be
publicly vetted prior to initiating the interview process.
The Phase 3 (sub-group analysis) questionnaire will solicit
information on the possible impacts of potential efficiency levels on
manufacturing costs, product prices, and sales. Evaluation of the
possible impacts on direct employment, capital assets, and industry
competitiveness will also draw heavily on the information gathered
during the interviews. The questionnaires will solicit both qualitative
and quantitative information. Supporting information will be requested
whenever applicable.
Interviews will be scheduled well in advance in order to provide
every opportunity for key individuals to be available for comment.
Although a written response to the questionnaire is acceptable, an
interactive interview process is preferred because it helps clarify
responses and provides the opportunity for additional issues to be
identified.
Interview participants will be requested to identify all
confidential information provided in writing or orally. Approximately
two weeks following the interview, an interview summary will be
provided to give participants the opportunity to confirm the accuracy
and protect the confidentiality of collected information. All the
information transmitted will be considered, when appropriate, in the
Department's decision-making process. However, confidential information
will not be made available in the public record.
DOE will collate the completed interview questionnaires and prepare
a summary of the major issues and outcomes. The Department will seek
comment on the outcome of the interview process.
b. Product Specific
The Department completed a round of preliminary interviews at the
start of the
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Engineering Analysis that focused on design and cost issues. A second
round of interviews will be scheduled soon after publication of the
Supplemental ANOPR. The intent will be to develop an accurate
representation of the impacts of new standards on each sub-group. As
noted previously, the Department intends to examine two sub-groups:
high-volume manufacturers and low-volume manufacturers.
H. Competitive Impact Assessment
a. General
EPCA directs the Department to consider any lessening of
competition that is likely to result from standards. It directs the
Attorney General to gauge the impacts, if any, of any lessening of
competition. The Department will make a determined effort to gather and
report firm-specific financial information and impacts. The competitive
analysis will focus on assessing the impacts to smaller, yet
significant, manufacturers. The assessment will be based on
manufacturing cost data and on information collected from interviews
with manufacturers, consistent with Phase 3 of the manufacturer impact
analyses. The Department of Justice (DOJ) has offered to help in
drafting questions to be used in the manufacturer interviews. These
questions will pertain to the assessment of the likelihood of increases
in market concentration levels and other market conditions that could
lead to anti-competitive pricing behavior. The manufacturer interviews
will focus on gathering information that would help in assessing
asymmetrical cost increases to some manufacturers, increased proportion
of fixed costs potentially increasing business risks, and potential
barriers to market entry (proprietary technologies, etc.).
b. Product Specific
The Department will consult with DOJ prior to conducting the
manufacturer interviews and will share the results of those interviews
and subsequent analyses with DOJs according to the rulemaking schedule,
and as appropriate.
I. Utility Analysis
The Utility Analysis estimates the effects of proposed standards on
electric and gas utilities.
1. Proposed Methodology
a. General
To estimate the effects of proposed standards on electric and gas
utilities, the Department intends to use EIA's NEMS. NEMS is a large
multi-sectoral partial-equilibrium model of the U.S. energy sector that
has been developed over several years by EIA primarily to prepare the
AEO. NEMS produces a widely recognized baseline forecast for the U.S.
through 2020, and is available in the public domain. Outputs of the
Utility Analysis will parallel results that appear in the latest AEO,
with some additions. Typical output includes forecasts of sales and
price. The entire Utility Analysis will be conducted as a policy
deviation from the latest AEO using NEMS-BRS, and the assumptions in
place in NEMS will serve as the basic set of assumptions that will be
applied to the Utility Analysis. For example, the operating
characteristics (energy efficiency, emissions rates, etc.) of future
electricity generating plants used in the Utility Impact Analysis will
be those used in the latest AEO. As discussed earlier, NEMS-BRS is a
variant of U.S. DOE/EIA's NEMS and is referred to as such for two
reasons: (1) The Utility Analysis to be performed entails some minor
code modifications and (2) the model will be run under policy
deviations that are variations on DOE/EIA assumptions. The name NEMS-
BRS refers to the model that will be used for the Utility Analysis (BRS
is DOE's Building Research and Standards office).
Forecasting for the electric utility industry is seriously
complicated by the implications of industry restructuring, which is
only partially reflected in the latest AEO (1999). DOE plans to explore
the consequences of a wider restructuring pattern through appropriate
scenario analysis using NEMS-BRS.
NEMS offers a sophisticated picture of the effect of appliance
standards since its scale allows it to measure the interactions between
the various energy supply and demand sectors and the economy as a
whole. In addition, the scale of NEMS permits analysis of the effects
of standards on both the electric and gas utility industries.
b. Product Specific
To analyze the effect of standards, NEMS-BRS will first be run
exactly as it would be to produce an AEO forecast, then a second run
will be conducted with residential energy usage reduced by the amount
of energy (gas, oil, and electricity) saved due to appliance standards
for central air conditioners and heat pumps. The energy savings input
will be obtained from the NES spreadsheet (section II.E.1). Outputs
available are the same as those in the original NEMS model, including
residential energy prices, generation, and installed capacity (and, in
the case of electricity, which primary fuel is used for generation).
Other than the difference in energy consumption due to central air
conditioner and heat pump standards, input assumptions into NEMS-BRS
will follow those used to produce the 1999 AEO.
Since the AEO 1999 version of NEMS-BRS forecasts only to the year
2020, a method for extrapolating price data to 2030 is required. The
method adopted will be the EIA approach to forecasting fuel prices for
the Federal Energy Management Programs (FEMP). These are the prices
used by FEMP to estimate LCCs of Federal equipment procurement. For
petroleum products, the average growth rate for the world oil price
over the years 2010 to 2020 is used in combination with the refinery
and distribution markups for the year 2020 to determine regional price
forecasts. Similarly, natural gas prices are derived from an average
growth rate along with regional price margins for the year 2020.
Electricity prices are held constant at 2020 levels on the assumption
that the transition to a restructured utility industry will have been
completed.
In principle, any of the forecasts that appear in the 1999 AEO
could be estimated by NEMS-BRS to take into account the effects of a
particular level of central air conditioner and heat pump standards.
The Department intends to report the major results on residential sales
of fuels, prices of fuels, and generating sources displaced by energy
savings. As might be expected, as the total energy use of America is
much larger than that possible due to the savings from central air
conditioners and heat pumps, there is little expected difference in the
forecasted price of energy.
EEI stated that the Utility Analysis should incorporate the impact
of any new standard on the equipment's Energy Efficiency Ratio (EER)
rating in order to establish the impact on peak loads and power plant
operation. The analysis should also be market based, and take into
account that several merchant plants are coming on-line and that
customers, rather than utility dispatchers, will dictate how power
plants are utilized to meet air conditioning loads. (EEI, #2) Since it
incorporates representative load shapes for central air conditioners
and heat pumps, NEMS-BRS has the capability to determine both the
impacts on power plant operation and peak loads that result from
central air conditioner and heat pump energy savings. Thus, the type of
power plant that will go off-line and the resulting reduction in peak
loads can and will be determined.
[[Page 66336]]
J. Environmental Analysis
An Environmental Assessment is required pursuant to the National
Environmental Policy Act of 1969 (NEPA) (42 U.S.C. 4321 et seq.),
regulations of the Council on Environmental Quality (49 CFR parts 1500-
1508), the Department regulations for compliance with NEPA (10 CFR part
1021), and the Secretarial Policy on the National Environmental Policy
Act (June 1994). The Department will present a discussion of the Draft
Environmental Assessment as part of the NOPR. The Department will
present the Draft Environmental Assessment in the Technical Support
Document for the NOPR. The NOPR will provide an opportunity for
comments prior to the final rule.
The Environmental Analysis will track three types of energy-related
airborne emissions: sulfur dioxide (SO2), nitrogen oxides
(NOx) and carbon dioxide (CO2). The first two
have direct consequences for human health, and are major causes of acid
precipitation, which can affect humans by reducing the productivity of
farms, forests and fisheries, decreasing recreational opportunities and
degrading susceptible buildings and monuments. NOx is also a
precursor gas to urban smog and is particularly detrimental to air
quality during hot, still weather. CO2 emissions are
believed to contribute to raising the average global temperature via
the ``greenhouse effect.'' The long-term consequences of higher
temperatures may include perturbed air and ocean currents, perturbed
precipitation patterns, changes in the gaseous equilibrium between the
atmosphere and the biosphere, and the melting of some of the ice now
covering polar lands and oceans, causing a rise in sea level. The
source of emissions covered in this analysis is fossil fuel-fired
electricity generation.
1. Proposed Methodology
a. General
To perform the Environmental Analysis, the Department intends to
use NEMS-BRS, which it also uses for the Utility Impact Analysis
described in the previous section. Outputs of the Environmental
Analysis will parallel results that appear in the latest AEO, with some
additions. The Department will conduct entire Environmental Analysis as
a policy deviation from the latest AEO using NEMS-BRS, and the
assumptions in place in NEMS will serve as the basic set of assumptions
that will be applied to the Environmental Analysis.
Carbon emissions (which are a physically equivalent indicator of
actual emissions of carbon dioxide) are tracked in NEMS-BRS by a
detailed carbon module with broad coverage of all sectors and inclusion
of interactive effects. NEMS-BRS also includes a module for
SO2 allowance trading and delivers a forecast of
SO2 allowance prices. Accurate simulation of SO2
trading, however, tends to imply that physical emissions effects will
be zero. This fact has caused considerable confusion in the past, and,
in prior appliance standards analyses, a simple figure for emission
reductions has been reported, with the caveat that emissions trading
implies that this reduction will unlikely be realized. On the other
hand, there is an SO2 benefit from conservation in the form
of a lower allowance price. If the reduction in allowance price is
large enough to be calculable by NEMS-BRS, the Department will report
this value.
The results for the Environmental Analysis can be in the form of a
complete NEMS-BRS run. In general, NEMS-BRS outputs become the tables
of an AEO, and these should provide a good idea of the range of results
available. Outputs from a NEMS-BRS run include SO2,
NOX and CO2 emissions from the power sector and a
trading price for SO2 allowances. The only form of carbon
tracked by NEMS-BRS is CO2, so the carbon discussed in the
analysis is only in the form of CO2 but is reported as
elemental carbon to remain consistent with the 1999 AEO. The conversion
factor from carbon to CO2 is approximately 3.7.
b. Product Specific
The version of NEMS used for appliance standards analysis is called
NEMS-BRS, and is based on the 1999 AEO version with minor
modifications. NEMS-BRS is run exactly the same as the original NEMS,
except that residential energy usage is reduced by the amount of energy
(gas, oil, and electricity) saved due to central air conditioner and
heat pump standards. The amount of energy savings is obtained from the
NES spreadsheet (Section 8.2). The output of the Environmental Analysis
is forecasted physical emissions. The net benefits of a standard will
be the difference between emissions estimated by the AEO 1999 version
of NEMS-BRS and those estimated with a standard in place.
Energy use for central air conditioner and heat pump efficiency
levels will be the same as those in the NES spreadsheet. Other input
assumptions into NEMS-BRS will follow those used to produce AEO 1999.
In principle, any of the forecasts that appear in AEO 1999 could be
estimated by NEMS-BRS to take into account the effects of a particular
central air conditioner and heat pump efficiency standard level, but,
in the standard reporting, the Department intends to report emissions
of SO2, NOX and CO2.
The time horizon of NEMS-BRS is 2020. The Department will
extrapolate beyond 2020 using a simple formula (according to the method
set out in the Preliminary TSD) to extend the forecast to 2030. The
Department will generate alternative price forecasts corresponding to
the side cases found in AEO 1999 for use by NES and will explore
alternatives in a similar fashion with NEMS-BRS runs.
EEI stated the environmental impact results generated from NEMS
will be less accurate than they could be, since consumers may switch
electricity suppliers and since the impacts from other emissions, such
as carbon monoxide and precursor organic compounds, are not being
analyzed.(EEI, #2) EMPA also stated that NEMS does not accurately
account for recent changes in the electric utility industry. (EMPA, #3)
Although NEMS might have some short comings, the Department believes
that NEMS-BRS is the most appropriate and accurate model to estimate
environmental impacts. Although the Department is comfortable with the
use of NEMS-BRS for establishing environmental impacts, interested
parties are welcome to present any other models or data that could
verify or refute the NEMS estimates.
K. Regulatory Impact Analysis
DOE will be preparing a draft Regulatory Analysis pursuant to E.O.
12866, ``Regulatory Planning and Review,'' which will be subject to
review under the Executive Order by the Office of Information and
Regulatory Affairs (OIRA) 58 FR 51735 (October 4, 1993).
As part of the Regulatory Analysis, the Department will identify
and seek to mitigate the overlapping effects on manufacturers of new or
revised DOE standards and other regulatory actions affecting the same
products. Through manufacturer interviews and literature searches, the
Department will compile information on burdens from existing and
impending regulations affecting central air conditioners (e.g. HCFC
phase out) and other products (e.g. room air conditioners). The
Department also seeks input from stakeholders regarding other
regulations that should be considered.
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III. Proposed Standards Scenarios
Upon reviewing the preliminary LCC and NES results, the Department
observes that the efficiency levels analyzed; (generally a 10 to 70
percent improvement over the existing standard), produced a range of
impacts at the National level. For example, the NES impacts show a
range from 0.81 to 14.11 quads of energy saved over the 2006 to 2030
period. As expected, the higher the efficiency level, the greater the
savings.
The national Net Present Value (NPV), which is the discounted sum
over future years of the operating cost savings in energy less the
increase in first cost of more efficient units, also showed a range of
impacts. A positive NPV is a net benefit to the nation. The NPVs based
on reverse engineering costs show positive benefits to the Nation for
all efficiency levels less than 13 SEER (with the exception of the 12
SEER efficiency level for split system air conditioners), while NPVs
based on industry-provided manufacturer costs show negative benefits to
the nation for all efficiency levels.
At the consumer level, the LCC and payback analyses results also
depend on manufacturer costs. For example, with reverse engineering
costs, minimum LCC occurs at 12 SEER for all product classes, and with
industry-provided costs, minimum LCC occurs at 12 SEER for heat pumps
(both split system and packaged), but there is no minimum LCC for air
conditioners. Payback analyses for SEER 12 equipment also show a range
of payback times varying from 3 to 15 years, depending on the product
class and the manufacturer costs.
The maximum technologically feasible efficiency levels for these
products (approximately 20 SEER in 2006) were not explicitly analyzed
in this Supplemental ANOPR because the Department assumed that the
products could not be economically justified. While the split-system
air conditioner with the highest efficiency in the market in 1998 was
rated at SEER 18, the most efficient product analyzed in this
Supplementary ANOPR was SEER 17. At this efficiency level, all the
products had greater LCCs than the baseline and had payback periods
that exceeded the mean product lifetime. The Department assumed that
products with efficiencies greater than SEER 17 would have greater
incremental costs than incremental savings, and that, consequently,
efficiency levels greater than SEER 17 could not be economically
justified. This assumption will be reexamined prior to issuance of the
NOPR, where products at the maximum technologically feasible level will
be analyzed.
Based on the analyses performed, the Department observes that,
depending on product class, efficiency levels ranging from 11 to 13
SEER would appear to result in the greatest economic benefit to the
Nation. The Process Rule requires the Department to specify in the
ANOPR candidate standards levels, but not to propose a particular
standard. Because the preliminary LCC and NES results show economic
benefits to both consumers and to the Nation in the SEER 11 to 13
efficiency range, the Department intends to further consider and
conduct analyses for the following candidate standards levels, for each
product class, prior to issuance of the NOPR:
SEER 11
SEER 12
SEER 13
In addition, the Department intends to conduct Engineering and LCC
analyses specifically for the Maximum Technologically Feasible
(approximately SEER 20) level for each product class prior to issuance
of the NOPR.
Split System Central Air Conditioners: The minimum mean LCC for
split system air conditioners occurs at either 11 or 12 SEER, based on
the industry cost data or the reverse engineering manufacturing cost
data, respectively. Although the minimum mean LCC occurs at efficiency
levels greater than the baseline (10 SEER) in both of the these cases,
the percent of the population with LCCs lower than the baseline is less
than 50% (39% at 11 SEER, based on industry data, and 45% at 12 SEER,
based on reverse engineering data). The median payback periods
corresponding to the industry data and reverse engineering LCC
minimums, 13 and 11 years, respectively, are both less than the 18.4
year average product lifetime. However, mean payback periods exceed the
average product lifetime.
Split System Heat Pumps: The minimum mean LCC for split system heat
pumps occurs at 12 SEER for both the industry cost data and the reverse
engineering manufacturing cost data, although based on the reverse
engineering cost data, the mean LCC corresponding to 13 SEER is also
less than that for the baseline. The percent of the split heat pump
population at 12 SEER with LCCs lower than the baseline is well above
50% based on both the industry data and reverse engineering cost data
(63% based on industry data and 90% based on reverse engineering). The
median payback periods corresponding to the industry data and reverse
engineering LCC minimums, 8 and 3 years, respectively, are both less
than the average 18.4 year product lifetime.
Single Package Air Conditioners: The minimum mean LCC for single
package air conditioners occurs at either 10 or 12 SEER, based on the
industry cost data or the reverse engineering manufacturing cost data,
respectively. The percent of the population at 12 SEER with LCCs lower
than the baseline varies significantly depending on which cost data are
used; the industry cost data results in a percentage of 26% while the
reverse engineering cost data results in a percentage of 58%. The
median payback periods corresponding to the industry data at 11 SEER
efficiency level and the reverse engineering 12 SEER efficiency level
are 20 and 8 years, respectively.
Single Package Heat Pumps: The minimum mean LCC for single package
heat pumps occurs at 12 SEER for both the industry cost data and the
reverse engineering manufacturing cost data. The percent of the single
package heat pump population at 12 SEER with LCCs lower than the
baseline is above 50% (58% and 80%, based on industry data and reverse
engineering data, respectively). The median payback periods
corresponding to the industry data and reverse engineering LCC
minimums, 9 and 5 years, respectively, are less than the mean lifetime
of the product.
The above observations are based on preliminary LCC and NES
results, which will be updated and revised in the NOPR and final rule
analyses. The LCC and NES results are considered preliminary because
they do not include any results from the manufacturer impact and
consumer subgroup analyses, or contain information from a consumer
survey. The Department seeks comments on whether standards that meet
alternative scenarios would provide energy savings to the Nation
comparable to the savings that would be obtained by the highest
standards that are technologically feasible and economically justified
effective in 2006. Standards that meet the following alternative
scenarios, for example, might be presented to the Department for
consideration:
A moderate increase in the efficiency level at an earlier
effective date, for example, an effective date three years after the
publication of the Final Rule.
A stringent increase in efficiency level at a later
effective date, for
[[Page 66338]]
example, an effective date in 2010 coinciding with the HCFC-22 phase
out.
A two-phase approach combining the two scenarios, for
example, a lower efficiency level for some product classes effective at
an earlier date and a higher efficiency level effective at a later
date.
The Department seeks comments on standards under various scenarios,
including the candidate standards, for consideration in preparing the
analysis on which the Department will base the proposed rule.
IV. Public Comment Procedures
A. Participation in Rulemaking
The Department encourages the maximum level of public participation
possible in this rulemaking. Individual consumers, representatives of
consumer groups, manufacturers, associations, States or other
governmental entities, utilities, retailers, distributors,
manufacturers, and others are urged to submit written statements on the
analysis presented here.
The Department has established a period of 75 days following
publication of this notice for persons to comment. All public comments
received will be available for review in the Department's Freedom of
Information Reading Room. In addition, the following data is available
in the Department's Freedom of Information Reading Room:
Copies of the Preliminary TSD
Transcripts of the Central Air Conditioning policy Workshop
held on June 30, 1998
Copies of the public comments received by the Department thus
far
Previous Federal Register notices relating to this central air
conditioner and heat pump rulemaking
A public hearing will be held on December 9, 1999, (9 a.m.--5
p.m.), at the U.S. Department of Energy, Forrestal Building, 1000
Independence Avenue SW, Room 1E-245, Washington, DC 20585. More
detailed information about this hearing will be on the Office of Codes
and Standards web site beginning in November. The web site address is
as follows: http://www.eren.doe.gov/buildings/codes__standards/
index.htm.
B. Written Comment Procedures
Interested persons are invited to participate in this proceeding by
submitting written data, views, or arguments with respect to the
subjects set forth in this notice. Comments will not be accepted by fax
or e-mail. Instructions for submitting written comments are set forth
at the beginning of this notice and in this section.
Comments should be labeled both on the envelope and on the
documents, ``Central Air Conditioners and Heat Pumps Rulemaking (Docket
No. EE-RM-94-403),'' and must be received by the date specified at the
beginning of this document. The Department requests that ten copies of
your comments be submitted. Additionally, the Department would
appreciate an electronic copy of the comments to the extent possible.
The Department is currently using WordPerfectTM 8. All
comments and other relevant information received by the date specified
at the beginning of this notice will be considered by the Department in
the proposed rule.
All written comments received on this supplemental Advance Notice
of Proposed Rulemaking will be available for public inspection at the
Freedom of Information Reading Room, as provided at the beginning of
this notice.
Pursuant to the provisions of 10 CFR 1004.11, any person submitting
information or data that is believed to be confidential, and exempt by
law from public disclosure, should submit one complete copy of the
document and ten (10) copies, if possible, from which the information
believed to be confidential has been deleted. The Department will make
its own determination with regard to the confidential status of the
information or data and treat it according to its determination.
Factors of interest to the Department, when evaluating requests to
treat information as confidential, include: (1) A description of the
item; (2) an indication as to whether and why such items of information
have been treated by the submitting party as confidential, and whether
and why such items are customarily treated as confidential, and whether
and why such items are customarily treated as confidential within the
industry; (3) whether the information is generally known or available
from other sources; (4) whether the information has previously been
available to others without obligation concerning its confidentiality;
(5) an explanation of the competitive injury to the submitting person
that would result from public disclosure; (6) an indication as to when
such information might lose its confidential character due to the
passage of time; and (7) whether disclosure of the information would be
in the public interest.
C. Issues for Public Comment
The Department is interested in receiving comments and data to
improve its preliminary analysis. In particular, the Department is
interested in responses to the following questions and/or concerns that
were addressed in this notice.
1. Differences between the industry and the reverse engineering
cost data:
Use of the industry and the reverse engineering cost data
yield significantly different LCC, payback period, NES, and NPV
results. Efforts preceding the publication of this Supplemental ANOPR
between the Department and the industry have yet to reveal why
differences still persist between the two sets of cost data. Continued
efforts and suggestions are needed to resolve the differences between
the two cost data sets. These differences are discussed in the Process
Improvement section (I B.3.).
2. The incorporation of emerging technologies into the Engineering
Analysis:
The Department has conducted a preliminary analysis of how
emerging technologies may impact the manufacturing costs of achieving
higher efficiency levels. But due to the uncertainty associated with
the future development of these technologies, in particular,
microchannel heat exchangers, advanced compressors, and variable speed
motor controls, the costs currently projected for their incorporation
into air conditioning and heat pump equipment may change significantly.
3. The assessment of the impacts on steady-state efficiency, i.e.
EER, due to increases in the SEER:
Comments submitted by the EEI and the ACEEE call for
assessments of how the Energy Efficiency Ratio (EER) of air
conditioning and heat pump equipment may be impacted by an increase in
the SEER. In particular, they are concerned that a higher efficiency
standard based on SEER may lead to a decrease in steady-state
efficiency during peak demand because of the prevalence of modulating
systems at the higher SEER levels. Up to efficiency levels of 12 SEER,
the rate of EER increase is directly proportional to the increase in
SEER as manufacturers typically rely on single-speed technology to
attain the SEER increase. But as efficiency levels move beyond 12 SEER,
manufacturers use an array of technologies that have significantly
different impacts on EER. How should the Department quantify the
relationship of EER to the higher SEER values?
4. For heat pump systems, the relationship between SEER and HSPF:
Based on heat pumps in the marketplace, a range of HSPF
values are possible for any particular SEER. But recognizing that the
HSPF of heat pump equipment generally increases with
[[Page 66339]]
SEER, the current analysis assumes a simple relationship between the
two efficiency descriptors for purposes of setting an HSPF standard in
addition to a SEER standard for heat pumps. Should the Department
continue with this simple approach or should another procedure be
developed to assess the impact of SEER on HSPF?
5. Additional product classes based on system capacity:
The current analyses are based on manufacturing cost data
developed for nominal 3-ton capacity systems. Although product
shipments are predominantly at nominal capacities of 3-tons, the cost
of achieving higher efficiency for systems with higher and lower
capacities may be different. If data submitted in response to this
Supplemental ANOPR reveals significantly different manufacturing cost
increases based on system capacity, the Department will analyze whether
this results in justifiably lower or higher efficiency levels for
equipment of differing capacity.
6. Niche product classes:
Several manufacturers have asked the Department to
establish new classes to protect the viability of certain niche
products under higher efficiency standards. These products (ductless
split systems, high-velocity/small duct systems, vertical packaged/wall
mounted systems, and through-the-wall condensing units) serve niche
markets and probably account for less than three percent of the
residential unitary market. As such, the efficiency standard
established for these products will have little effect on NES and
consumer LCC. The Department seeks comments as to whether these
products provide a unique utility that cannot be met by other products.
One important question is whether the constraints imposed by higher
standards would eliminate these products from the marketplace. For this
reason the Department is also interested in recommendations as to how
to define these new product classes so that these products would
continue to be available to satisfy the unique needs for which they are
intended.
7. The impact of alternative refrigerants for HCFC-22:
The current analysis assumes that the phase-out date for
HCFC-22 is far enough in the future that it will not affect a
manufacturer's ability to meet any new efficiency standards, whether
using HCFC-22 before the phase-out, or using alternative refrigerants
before and after the phase-out. Through manufacturer interviews and
literature searches, the Department plans to compile information on
burdens from existing and impending regulations affecting central air
conditioners (e.g. HCFC phase out). But should the Department more
explicitly account for the impact of the HCFC phase out in the
Engineering Analysis? Any analysis in this area will require assessment
of the impact on manufacturer cost due to the use of the alternative
refrigerant.
8. Data on retail mark-up assumptions:
Retail mark-up assumptions are based upon the following
distribution chain: manufacturer-to-distributor/wholesaler-to-
contractor/dealer. Although this is not the only type of distribution
chain currently in existence for central air conditioning and heat pump
equipment, it is assumed that the mark-ups reflected by this chain of
distribution will reflect the mark-ups resulting from other methods of
distribution (e.g., manufacturer directly to dealer). At present the
Department does not intend to change the retail mark-up assumptions but
will continue to research data sources and seek comment on this issue.
9. Information relating to the determination of price and operating
cost elasticities in conducting shipment forecasts:
In order to determine the effect of an increase in the
purchase price and operating cost on shipments, it would be useful to
know the elasticities of central air conditioner and heat pump prices
and operating costs. Due to the lack of data in this area specific to
central air conditioners and heat pumps, the Department is currently
using elasticities developed from analyses conducted over twenty years
ago. With regard to purchase price, in making estimates of these
effects, the Department needs to estimate how price changes resulting
from revised energy efficiency standards for central air conditioners
and heat pumps will affect the behavior of consumers in their
purchasing decisions.
10. Data on the possible adverse affects of standards on
identifiable groups of consumers that experience below-average utility
or usage rates:
The consumer analysis can evaluate impacts on any
identifiable groups, such as consumers of different income levels, who
may be disproportionately affected by any national energy efficiency
standard level.
11. Information on what non-regulatory alternatives to standards
need to be reviewed:
Under the Process Rule policies, the Department is
committed to continually explore non-regulatory alternatives to
standards. The table following presents what is being proposed for
consideration in this rulemaking. The Department is seeking comments on
this approach. This approach is further discussed in the Preliminary
TSD.
Alternatives To Be Considered
--No new regulatory action
--Consumer tax credits
--Manufacturer tax credits
--Performance standards
--Rebates
--Voluntary energy efficiency targets
--Early replacement
--Mass government purchases
12. Comments on the candidate standard levels and the alternative
standard scenarios.
The Department has identified candidate standards levels
of 11 SEER, 12 SEER and 13 SEER for all product classes. The Department
has also provided examples of several alternative scenarios which could
have different effective dates and different standards levels but which
could provide comparable energy savings.
[[Page 66340]]
V. Review Under Executive Order 12866 and Other Provisions
DOE provided to the Office of Information and Regulatory Affairs
(OIRA) in the Office of Management and Budget a copy of this document
for comment. At the proposal stage for this rulemaking, DOE and OIRA
will determine whether this rulemaking is a significant regulatory
action under Executive Order 12866, Regulatory Planning and Review. 58
FR 51735 (October 4, 1993). Were DOE to propose amendments to the
energy conservation standards for central air conditioners and heat
pumps, the rulemaking could constitute an economically significant
regulatory action and DOE would prepare and submit to OIRA for review
the assessment of costs and benefits required by Section 6(a)(3) of
Executive Order 12866. Other procedural and analysis requirements in
other Executive Orders and statutes also may apply to such future
rulemaking action, including the requirements of the regulatory
Flexibility Act, 5 U.S. C. 601 et seq.; the Paperwork Reduction Act, 44
U.S.C. 3501 et seq.; and the Unfunded Mandates Act of 1995, Pub. L.
104-4; and the National Environmental Policy Act of 1969, 42 U.S. C.
4321 et seq.
Today's action and any other documents submitted to OIRA for review
have been made a part of the rulemaking record and are available for
public review in the Department's Freedom of Information Reading Room,
1000 Independence Avenue, SW, Room 1E-190, Washington, DC 20585 between
the hours of 9 and 4, Monday through Friday, telephone (202) 586-3142.
Issued in Washington, DC, on November 8, 1999.
Dan W. Reicher,
Assistant Secretary, Energy Efficiency and Renewable Energy.
[FR Doc. 99-30480 Filed 11-23-99; 8:45 am]
BILLING CODE 6450-01-P