[Federal Register Volume 88, Number 144 (Friday, July 28, 2023)]
[Proposed Rules]
[Pages 49058-49177]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-15306]



[[Page 49057]]

Vol. 88

Friday,

No. 144

July 28, 2023

Part III





Department of Energy





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10 CFR Parts 429 and 430





Energy Conservation Program: Energy Conservation Standards for Consumer 
Water Heaters; Proposed Rule

  Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / 
Proposed Rules  

[[Page 49058]]


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DEPARTMENT OF ENERGY

10 CFR Parts 429 and 430

[EERE-2017-BT-STD-0019]
RIN 1904-AD91


Energy Conservation Program: Energy Conservation Standards for 
Consumer Water Heaters

AGENCY: Office of Energy Efficiency and Renewable Energy, Department of 
Energy.

ACTION: Notice of proposed rulemaking and announcement of public 
meeting.

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SUMMARY: The Energy Policy and Conservation Act, as amended (``EPCA''), 
prescribes energy conservation standards for various consumer products 
and certain commercial and industrial equipment, including consumer 
water heaters. EPCA also requires the U.S. Department of Energy 
(``DOE'' or ``the Department'') to periodically determine whether more-
stringent standards would be technologically feasible and economically 
justified, and would result in significant energy savings. In this 
notice of proposed rulemaking (``NOPR''), DOE proposes amended energy 
conservation standards for consumer water heaters, and also announces a 
public meeting to receive comments on these proposed standards and 
associated analyses and results.

DATES: Comments: DOE will accept comments, data, and information 
regarding this NOPR no later than September 26, 2023.
    Comments regarding the likely competitive impact of the proposed 
standard should be sent to the Department of Justice contact listed in 
the ADDRESSES section on or before August 28, 2023.
    Meeting: DOE will hold a public meeting via webinar on September 
13, 2023, from 1:00 p.m. to 4:00 p.m. See section VII, ``Public 
Participation,'' for webinar registration information, participant 
instructions, and information about the capabilities available to 
webinar participants.

ADDRESSES: Interested persons are encouraged to submit comments using 
the Federal eRulemaking Portal at www.regulations.gov under docket 
number EERE-2017-BT-STD-0019. Follow the instructions for submitting 
comments. Alternatively, interested persons may submit comments, 
identified by docket number EERE-2017-BT-STD-0019, by any of the 
following methods:
    (1) Email: [email protected]. Include the 
docket number EERE-2017-BT-STD-0019 in the subject line of the message.
    (2) Postal Mail: Appliance and Equipment Standards Program, U.S. 
Department of Energy, Building Technologies Office, Mailstop EE-5B, 
1000 Independence Avenue SW, Washington, DC 20585-0121. Telephone: 
(202) 287-1445. If possible, please submit all items on a compact disc 
(``CD''), in which case it is not necessary to include printed copies.
    (3) Hand Delivery/Courier: Appliance and Equipment Standards 
Program, U.S. Department of Energy, Building Technologies Office, 950 
L'Enfant Plaza SW, 6th Floor, Washington, DC 20024. Telephone: (202) 
287-1445. If possible, please submit all items on a CD, in which case 
it is not necessary to include printed copies.
    No telefacsimiles (``faxes'') will be accepted. For detailed 
instructions on submitting comments and additional information on this 
process, see section IV of this document.
    Docket: The docket for this activity, which includes Federal 
Register notices, comments, and other supporting documents/materials, 
is available for review at www.regulations.gov. All documents in the 
docket are listed in the www.regulations.gov index. However, not all 
documents listed in the index may be publicly available, such as 
information that is exempt from public disclosure.
    The docket web page can be found at www.regulations.gov/docket/EERE-2017-BT-STD-0019. The docket web page contains instructions on how 
to access all documents, including public comments, in the docket. See 
section VII of this document for information on how to submit comments 
through www.regulations.gov.
    EPCA requires the Attorney General to provide to DOE a written 
determination of whether the proposed standard is likely to lessen 
competition. The U.S. Department of Justice Antitrust Division invites 
input from market participants and other interested persons with views 
on the likely competitive impact of the proposed standard. Interested 
persons may contact the Division at [email protected] on or 
before the date specified in the DATES section. Please indicate in the 
``Subject'' line of your email the title and Docket Number of this 
proposed rulemaking.

FOR FURTHER INFORMATION CONTACT: 
    Ms. Julia Hegarty, U.S. Department of Energy, Office of Energy 
Efficiency and Renewable Energy, Building Technologies Office, EE-5B, 
1000 Independence Avenue SW, Washington, DC 20585-0121. Email: 
[email protected].
    Ms. Melanie Lampton, U.S. Department of Energy, Office of the 
General Counsel, GC-33, 1000 Independence Avenue SW, Washington, DC 
20585-0121. Telephone: (240) 751-5157. Email: 
[email protected].
    For further information on how to submit a comment, review other 
public comments and the docket, or participate in the public meeting, 
contact the Appliance and Equipment Standards Program staff at (202) 
287-1445 or by email: [email protected].

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Synopsis of the Proposed Rule
    A. Benefits and Costs to Consumers
    B. Impact on Manufacturers
    C. National Benefits and Costs
    D. Conclusion
II. Introduction
    A. Authority
    B. Background
    1. Current Standards
    2. History of the Current Standards Rulemaking for Consumer 
Water Heaters
    C. Deviation From Appendix A
III. General Discussion
    A. Scope of Coverage
    B. Test Procedure
    C. Technological Feasibility
    1. General
    2. Maximum Technologically Feasible Levels
    D. Energy Savings
    1. Determination of Savings
    2. Significance of Savings
    E. Economic Justification
    1. Specific Criteria
    a. Economic Impact on Manufacturers and Consumers
    b. Savings in Operating Costs Compared to Increase in Price (LCC 
and PBP)
    c. Energy Savings
    d. Lessening of Utility or Performance of Products
    e. Impact of Any Lessening of Competition
    f. Need for National Energy Conservation
    g. Other Factors
    2. Rebuttable Presumption
    F. Interested Party Recommendations
IV. Methodology and Discussion of Related Comments
    A. Market and Technology Assessment
    1. Product Classes
    a. Circulating Water Heater and Low-Temperature Water Heaters
    b. Storage-Type and Instantaneous-Type Product Classes
    c. Gas-Fired Water Heaters
    d. Electric Storage Water Heaters
    2. Technology Options
    B. Screening Analysis
    1. Screened-Out Technologies
    2. Remaining Technologies

[[Page 49059]]

    C. Engineering Analysis
    1. Product Classes With Current UEF-Based Standards
    a. Efficiency Analysis
    b. Design Options
    c. Cost Analysis
    d. Shipping Costs
    e. Cost-Efficiency Results
    2. Product Classes Without Current UEF-Based Standards
    3. Manufacturer Selling Price
    D. Markups Analysis
    E. Energy Use Analysis
    1. Building Sample
    2. Consumer Water Heater Sizing and Draw Pattern
    3. Consumer Water Heater Energy Use Determination
    4. Heat Pump Water Heater Energy Use Determination
    F. Life-Cycle Cost and Payback Period Analysis
    1. Product Cost
    2. Installation Cost
    a. Basic Installation Costs and Inputs
    b. Gas-Fired and Oil-Fired Water Heater Installation Costs
    c. Condensate Withdrawal for Higher Efficiency Design Options
    d. Heat Pump Water Heater Installation Costs
    3. Annual Energy Consumption
    4. Energy Prices
    5. Maintenance and Repair Costs
    6. Product Lifetime
    7. Discount Rates
    8. Energy Efficiency Distribution in the No-New-Standards Case
    9. Accounting for Product Switching Under Potential Standards
    10. Payback Period Analysis
    G. Shipments Analysis
    1. Impact of Potential Standards on Shipments
    a. Impact of Consumer Choice for Electric Storage Water Heaters
    b. Impact of Repair vs. Replace
    H. National Impact Analysis
    1. Product Efficiency Trends
    2. National Energy Savings
    3. Net Present Value Analysis
    I. Consumer Subgroup Analysis
    1. Low-Income Households
    J. Manufacturer Impact Analysis
    1. Overview
    2. Government Regulatory Impact Model and Key Inputs
    a. Manufacturer Production Costs
    b. Shipments Projections
    c. Product and Capital Conversion Costs
    d. Manufacturer Markup Scenarios
    3. Manufacturer Interviews
    a. Level of Investment Associated With Concurrent Technology 
Shifts
    b. Lowboy Electric Storage Water Heaters
    4. Discussion of MIA Comments
    K. Emissions Analysis
    1. Air Quality Regulations Incorporated in DOE's Analysis
    L. Monetizing Emissions Impacts
    1. Monetization of Greenhouse Gas Emissions
    a. Social Cost of Carbon
    b. Social Cost of Methane and Nitrous Oxide
    2. Monetization of Other Emissions Impacts
    M. Trial Standard Levels
    N. Utility Impact Analysis
    O. Employment Impact Analysis
V. Analytical Results and Conclusions
    A. Economic Justification and Energy Savings
    1. Economic Impacts on Individual Consumers
    a. Life-Cycle Cost and Payback Period
    b. Consumer Subgroup Analysis
    c. Rebuttable Presumption Payback
    2. Economic Impacts on Manufacturers
    a. Industry Cash Flow Analysis Results
    b. Direct Impacts on Employment
    c. Impacts on Manufacturing Capacity
    d. Impacts on Subgroups of Manufacturers
    e. Cumulative Regulatory Burden
    3. National Impact Analysis
    a. Significance of Energy Savings
    b. Net Present Value of Consumer Costs and Benefits
    c. Indirect Impacts on Employment
    4. Impact on Utility or Performance of Products
    5. Impact of Any Lessening of Competition
    6. Need of the Nation To Conserve Energy
    7. Other Factors
    8. Summary of Economic Impacts
    B. Conclusion
    1. Benefits and Burdens of TSLs Considered for Consumer Water 
Heater Standards
    2. Annualized Benefits and Costs of the Proposed Standards
    C. Test Procedure Applicability
    1. Efficiency Determinations Using High Temperature Testing
    2. Circulating Water Heaters
    a. Storage Tank for Circulating Heat Pump Water Heaters
    b. Product-Specific Enforcement Provisions for Circulating Water 
Heaters
    3. Determination of Storage Volume for Water Heaters Less Than 2 
Gallons
VI. Procedural Issues and Regulatory Review
    A. Review Under Executive Orders 12866, 13563 and 14094
    B. Review Under the Regulatory Flexibility Act
    1. Description of Reasons Why Action Is Being Considered
    2. Objectives of, and Legal Basis for, Rule
    3. Description on Estimated Number of Small Entities Regulated
    4. Description and Estimate of Compliance Requirements Including 
Differences in Cost, if Any, for Different Groups of Small Entities
    5. Duplication, Overlap, and Conflict With Other Rules and 
Regulations
    6. Significant Alternatives to the Rule
    C. Review Under the Paperwork Reduction Act
    D. Review Under the National Environmental Policy Act of 1969
    E. Review Under Executive Order 13132
    F. Review Under Executive Order 12988
    G. Review Under the Unfunded Mandates Reform Act of 1995
    H. Review Under the Treasury and General Government 
Appropriations Act, 1999
    I. Review Under Executive Order 12630
    J. Review Under the Treasury and General Government 
Appropriations Act, 2001
    K. Review Under Executive Order 13211
    L. Information Quality
VII. Public Participation
    A. Attendance at the Public Meeting
    B. Procedure for Submitting Prepared General Statements for 
Distribution
    C. Conduct of the Public Meeting Webinar
    D. Submission of Comments
    E. Issues on Which DOE Seeks Comment
    VIII. Approval of the Office of the Secretary

I. Synopsis of the Proposed Rule

    The Energy Policy and Conservation Act,\1\ as amended, Public Law 
94-163 (42 U.S.C. 6291-6317, as codified) authorizes DOE to regulate 
the energy efficiency of a number of consumer products and certain 
industrial equipment. Title III, Part B of EPCA \2\ established the 
Energy Conservation Program for Consumer Products Other Than 
Automobiles. (42 U.S.C. 6291-6309) These products include consumer 
water heaters, the subject of this proposed rulemaking.
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    \1\ All references to EPCA in this document refer to the statute 
as amended through the Energy Act of 2020, Public Law 116-260 (Dec. 
27, 2020), which reflect the last statutory amendments that impact 
Parts A and A-1 of EPCA.
    \2\ For editorial reasons, upon codification in the U.S. Code, 
Part B was redesignated Part A.
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    Pursuant to EPCA, any new or amended energy conservation standard 
must be designed to achieve the maximum improvement in energy 
efficiency that DOE determines is technologically feasible and 
economically justified. (42 U.S.C. 6295(o)(2)(A)) Furthermore, the new 
or amended standard must result in a significant conservation of 
energy. (42 U.S.C. 6295(o)(3)(B)) EPCA also provides that not later 
than 6 years after issuance of any final rule establishing or amending 
a standard, DOE must publish either a notice of determination that 
standards for the product do not need to be amended, or a notice of 
proposed rulemaking including new proposed energy conservation 
standards (proceeding to a final rule, as appropriate). (42 U.S.C. 
6295(m))
    In accordance with these and other statutory provisions discussed 
in this document, DOE proposes new and amended energy conservation 
standards for consumer water heaters. The proposed standards, which are 
expressed in terms of uniform energy factor (``UEF''), are shown in 
Table I.1. These proposed standards, if adopted, would apply to all 
consumer water heaters listed in Table I.1 manufactured in, or imported 
into, the United States starting on the date 5 years after the

[[Page 49060]]

publication of the final rule for this proposed rulemaking.

                  Table I.1--Proposed Energy Conservation Standards for Consumer Water Heaters
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                                      Effective storage
                                       volume and input
           Product class                 rating * (if             Draw pattern           Uniform energy factor
                                         applicable)
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Gas-fired Storage Water Heater....  <20 gal..............  Very Small...............     0.2062-(0.0020 x Veff)
                                                           Low......................     0.4893-(0.0027 x Veff)
                                                           Medium...................     0.5758-(0.0023 x Veff)
                                                           High.....................     0.6586-(0.0020 x Veff)
                                    >=20 gal and <=55 gal  Very Small...............     0.3925-(0.0020 x Veff)
                                                           Low......................     0.6451-(0.0019 x Veff)
                                                           Medium...................     0.7046-(0.0017 x Veff)
                                                           High.....................     0.7424-(0.0013 x Veff)
                                    >55 gal and <=100 gal  Very Small...............     0.6470-(0.0006 x Veff)
                                                           Low......................     0.7689-(0.0005 x Veff)
                                                           Medium...................     0.7897-(0.0004 x Veff)
                                                           High.....................     0.8072-(0.0003 x Veff)
                                    >100 gal.............  Very Small...............     0.1482-(0.0007 x Veff)
                                                           Low......................     0.4342-(0.0017 x Veff)
                                                           Medium...................     0.5596-(0.0020 x Veff)
                                                           High.....................     0.6658-(0.0019 x Veff)
Oil-fired Storage Water Heater....  <=50 gal.............  Very Small...............     0.2909-(0.0012 x Veff)
                                                           Low......................     0.5730-(0.0016 x Veff)
                                                           Medium...................     0.6478-(0.0016 x Veff)
                                                           High.....................     0.7215-(0.0014 x Veff)
                                    >50 gal..............  Very Small...............     0.1580-(0.0009 x Veff)
                                                           Low......................     0.4390-(0.0020 x Veff)
                                                           Medium...................     0.5389-(0.0021 x Veff)
                                                           High.....................     0.6172-(0.0018 x Veff)
Very Small Electric Storage Water   <20 gal..............  Very Small...............     0.5925-(0.0059 x Veff)
 Heater.                                                   Low......................     0.8642-(0.0030 x Veff)
                                                           Medium...................     0.9096-(0.0020 x Veff)
                                                           High.....................     0.9430-(0.0012 x Veff)
Small Electric Storage Water        >=20 gal and <=35 gal  Very Small...............     0.8808-(0.0008 x Veff)
 Heater.
                                                           Low......................     0.9254-(0.0003 x Veff)
Electric Storage Water Heaters....  >20 and <=55 gal       Very Small...............                       2.30
                                     (excluding small      Low......................                       2.30
                                     electric storage
                                     water heaters).
                                                           Medium...................                       2.30
                                                           High.....................                       2.30
                                    >55 gal and <=120 gal  Very Small...............                       2.50
                                                           Low......................                       2.50
                                                           Medium...................                       2.50
                                                           High.....................                       2.50
                                    >120 gal.............  Very Small...............     0.3574-(0.0012 x Veff)
                                                           Low......................     0.7897-(0.0019 x Veff)
                                                           Medium...................     0.8884-(0.0017 x Veff)
                                                           High.....................     0.9575-(0.0013 x Veff)
Tabletop Water Heater.............  <20 gal..............  Very Small...............     0.5925-(0.0059 x Veff)
                                                           Low......................     0.8642-(0.0030 x Veff)
                                    >=20 gal and <=120     Very Small...............     0.6323-(0.0058 x Veff)
                                     gal.
                                                           Low......................     0.9188-(0.0031 x Veff)
Instantaneous Gas-fired Water       <2 gal and <=50,000    Very Small...............                       0.64
 Heater.                             Btu/h.
                                                           Low......................                       0.64
                                                           Medium...................                       0.64
                                                           High.....................                       0.64
                                    <2 gal and >50,000     Very Small...............                       0.89
                                     Btu/h.
                                                           Low......................                       0.91
                                                           Medium...................                       0.91
                                                           High.....................                       0.93
                                    >=2 gal and <=200,000  Very Small...............     0.2534-(0.0018 x Veff)
                                     Btu/h.
                                                           Low......................     0.5226-(0.0022 x Veff)
                                                           Medium...................     0.5919-(0.0020 x Veff)
                                                           High.....................     0.6540-(0.0017 x Veff)
Instantaneous Oil-fired Water       <2 gal and <=210,000   Very Small...............                       0.61
 Heater.                             Btu/h.
                                                           Low......................                       0.61
                                                           Medium...................                       0.61
                                                           High.....................                       0.61
                                    >=2 gal and <=210,000  Very Small...............     0.2780-(0.0022 x Veff)
                                     Btu/h.
                                                           Low......................     0.5151-(0.0023 x Veff)
                                                           Medium...................     0.5687-(0.0021 x Veff)
                                                           High.....................     0.6147-(0.0017 x Veff)
Instantaneous Electric Water        <2 gal...............  Very Small...............                       0.91
 Heater.
                                                           Low......................                       0.91

[[Page 49061]]

 
                                                           Medium...................                       0.91
                                                           High.....................                       0.92
                                    >=2 gal..............  Very Small...............     0.8086-(0.0050 x Veff)
                                                           Low......................     0.9123-(0.0020 x Veff)
                                                           Medium...................     0.9252-(0.0015 x Veff)
                                                           High.....................     0.9350-(0.0011 x Veff)
Grid-Enabled Water Heater.........  >75 gal..............  Very Small...............     1.0136-(0.0028 x Veff)
                                                           Low......................     0.9984-(0.0014 x Veff)
                                                           Medium...................     0.9853-(0.0010 x Veff)
                                                           High.....................     0.9720-(0.0007 x Veff)
Gas-fired Circulating Water Heater  <=200,000 Btu/h......  Very Small...............     0.8000-(0.0011 x Veff)
                                                           Low......................     0.8100-(0.0011 x Veff)
                                                           Medium...................     0.8100-(0.0011 x Veff)
                                                           High.....................     0.8100-(0.0011 x Veff)
Oil-fired Circulating Water Heater  <=210,000 Btu/h......  Very Small...............     0.6100-(0.0011 x Veff)
                                                           Low......................     0.6100-(0.0011 x Veff)
                                                           Medium...................     0.6100-(0.0011 x Veff)
                                                           High.....................     0.6100-(0.0011 x Veff)
Electric Circulating Water Heater.  <=12 kW; for heat      Very Small...............     0.9100-(0.0011 x Veff)
                                     pump type units <=24
                                     A at <=250 V.
                                                           Low......................     0.9100-(0.0011 x Veff)
                                                           Medium...................     0.9100-(0.0011 x Veff)
                                                           High.....................     0.9200-(0.0011 x Veff)
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* Effective storage volume is the representative value of storage volume as determined in accordance with the
  DOE test procedure at appendix E to subpart B of 10 CFR part 430 and applicable sampling plans.

A. Benefits and Costs to Consumers

    Table I.2 presents DOE's evaluation of the economic impacts of the 
proposed standards on consumers of consumer water heaters, as measured 
by the average life-cycle cost (``LCC'') savings and the simple payback 
period (``PBP'').\3\ The average LCC savings are positive for all 
product classes, and the PBP is less than the average lifetime of 
consumer water heaters, which is estimated to be 15 years for storage 
and 20 years for instantaneous water heaters (see section IV.F of this 
document).
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    \3\ The average LCC savings refer to consumers that are affected 
by a standard and are measured relative to the efficiency 
distribution in the no-new-standards case, which depicts the market 
in the compliance year in the absence of new or amended standards 
(see section IV.F.8 of this document). The simple PBP, which is 
designed to compare specific efficiency levels, is measured relative 
to the baseline product (see section IV.F.9 of this document).

     Table I.2--Impacts of Proposed Energy Conservation Standards on
                   Consumers of Consumer Water Heaters
------------------------------------------------------------------------
                                 Effective
                               storage volume    Average LCC     Simple
        Product class            and input         savings      payback
                                 rating (if        (2022$)      (years)
                                applicable)
------------------------------------------------------------------------
Gas-fired Storage Water       >=20 gal and                 52        7.9
 Heater.                       <=55 gal.
Oil-fired Storage Water       <=50 gal.......             165        6.4
 Heater.
Electric Storage Water        >=20 gal and              1,868        3.0
 Heaters *.                    <=55 gal
                               (excluding
                               Small ESWHs).
                              >55 gal and                 501        0.2
                               <=120 gal.
Instantaneous Gas-fired       <2 gal and                  135        5.9
 Water Heater.                 >50,000 Btu/h
                               and <200,000
                               Btu/h.
------------------------------------------------------------------------
* DOE is not proposing amended standards for small electric storage
  water heaters (i.e., electric storage water heaters greater than or
  equal to 20 gallons but less than 35 gallons in effective storage
  volume, with first-hour ratings less than 51 gallons), so those
  products are not impacted by the proposed rule.

    DOE's analysis of the impacts of the proposed standards on 
consumers is described in section IV.F of this document.

B. Impact on Manufacturers

    The industry net present value (``INPV'') is the sum of the 
discounted cash flows to the industry from the base year through the 
end of the analysis period (2023-2059). Using a real discount rate of 
9.6 percent, DOE estimates that the INPV for manufacturers of consumer 
water heaters in the case without amended standards is $2,554.7 million 
in 2022$. Under the proposed standards, the change in INPV is estimated 
to range from negative 8.1 percent to positive 6.5 percent, which is a 
loss of $207.3 million to a gain of $165.5 million. In order to bring 
products into compliance with amended standards, it is estimated that 
the industry would incur total conversion costs of $228.1 million.
    DOE's analysis of the impacts of the proposed standards on 
manufacturers is described in section IV.J of this document. The 
analytic results of the manufacturer impact analysis (``MIA'') are 
presented in section V.B.2 of this document.

C. National Benefits and Costs 4
---------------------------------------------------------------------------

    \4\ All monetary values in this document are expressed in 2022 
dollars.
---------------------------------------------------------------------------

    DOE's analyses indicate that the proposed energy conservation 
standards for consumer water heaters would save a significant amount of 
energy. Relative

[[Page 49062]]

to the case without amended standards, the lifetime energy savings for 
consumer water heaters purchased in the 30-year period that begins in 
the anticipated year of compliance with the amended standards (2030-
2059) amount to 27 quadrillion British thermal units (``Btu''), or 
quads.\5\ This represents a savings of 21 percent relative to the 
energy use of these products in the case without amended standards 
(referred to as the ``no-new-standards case'').
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    \5\ The quantity refers to full-fuel-cycle (``FFC'') energy 
savings. FFC energy savings includes the energy consumed in 
extracting, processing, and transporting primary fuels (i.e., coal, 
natural gas, petroleum fuels), and, thus, presents a more complete 
picture of the impacts of energy efficiency standards. For more 
information on the FFC metric, see section IV.H.1 of this document.
---------------------------------------------------------------------------

    The cumulative net present value (``NPV'') of total consumer 
benefits of the proposed standards for consumer water heaters are $56 
billion at a 7-percent discount rate and $161 billion at a 3-percent 
discount rate. This NPV expresses the estimated total value of future 
operating-cost savings minus the estimated increased product and 
installation costs for consumer water heaters purchased in 2030-2059.
    In addition, the proposed standards for consumer water heaters are 
projected to yield significant environmental benefits. DOE estimates 
that the proposed standards would result in cumulative emission 
reductions (over the same period as for energy savings, 2030-2059) of 
501 million metric tons (``Mt'') \6\ of carbon dioxide 
(``CO2''), 143 thousand tons of sulfur dioxide 
(``SO2''), 988 thousand tons of nitrogen oxides 
(``NOX''), 4,541 thousand tons of methane 
(``CH4''), 4.6 thousand tons of nitrous oxide 
(``N2O''), and 1.0 tons of mercury (``Hg'').\7\
---------------------------------------------------------------------------

    \6\ A metric ton is equivalent to 1.1 short tons. Results for 
emissions other than CO2 are presented in short tons.
    \7\ DOE calculated emissions reductions relative to the no-new-
standards case, which reflects key assumptions in the Annual Energy 
Outlook 2023 (``AEO2023''). AEO2023 represents current federal and 
state legislation and final implementation of regulations as of the 
time of its preparation. See section IV.K of this document for 
further discussion of AEO2023 assumptions that effect air pollutant 
emissions. The AEO 2023 reflects the impact of the Inflation 
Reduction Act.
---------------------------------------------------------------------------

    DOE estimates the value of climate benefits from a reduction in 
greenhouse gases (``GHG'') using four different estimates of the social 
cost of CO2 (``SC-CO2''), the social cost of 
methane (``SC-CH4''), and the social cost of nitrous oxide 
(``SC-N2O''). Together these represent the social cost of 
GHG (``SC-GHG'').'').\8\ DOE used interim SC-GHG values developed by an 
Interagency Working Group on the Social Cost of Greenhouse Gases 
(``IWG'').\9\ The derivation of these values is discussed in section 
IV.L of this document. For presentational purposes, the climate 
benefits associated with the average SC-GHG at a 3-percent discount 
rate are estimated to be $25 billion. DOE does not have a single 
central SC-GHG point estimate and it emphasizes the importance and 
value of considering the benefits calculated using all four sets of SC-
GHG estimates.
---------------------------------------------------------------------------

    \8\ To monetize the benefits of reducing greenhouse gas 
emissions this analysis uses the interim estimates presented in the 
Technical Support Document: Social Cost of Carbon, Methane, and 
Nitrous Oxide Interim Estimates Under Executive Order 13990 
published in February 2021 by the Interagency Working Group on the 
Social Cost of Greenhouse Gases (IWG).
    \9\ See Interagency Working Group on Social Cost of Greenhouse 
Gases, Technical Support Document: Social Coast of Carbon, Methane, 
and Nitrous Oxide. Interim Estimates Under Executive Order 13990, 
Washington, DC, February 2021 (``February 2021 SC-GHG TSD''). 
www.whitehouse.gov/wp-content/uploads/2021/02/TechnicalSupportDocument_SocialCostofCarbonMethaneNitrousOxide.pdf.
---------------------------------------------------------------------------

    DOE estimated the monetary health benefits of SO2 and 
NOX emissions reductions using benefit per ton estimates 
from the scientific literature, as discussed in section IV.L of this 
document. DOE estimated the present value of the health benefits would 
be $17 billion using a 7-percent discount rate, and $49 billion using a 
3-percent discount rate.\10\ DOE is currently only monetizing (for 
SO2 and NOX) PM2.5 precursor health 
benefits and (for NOX) ozone precursor health benefits, but 
will continue to assess the ability to monetize other effects such as 
health benefits from reductions in direct PM2.5 emissions.
---------------------------------------------------------------------------

    \10\ DOE estimates the economic value of these emissions 
reductions resulting from the considered TSLs for the purpose of 
complying with the requirements of Executive Order 12866.
---------------------------------------------------------------------------

    Table I.3 summarizes the economic benefits and costs expected to 
result from the proposed standards for consumer water heaters. There 
are other important unquantified effects, including certain 
unquantified climate benefits, unquantified public health benefits from 
the reduction of toxic air pollutants and other emissions, unquantified 
energy security benefits, and distributional effects, among others.

  Table I.3--Summary of Monetized Benefits and Costs of Proposed Energy
            Conservation Standards for Consumer Water Heaters
                                 [TSL 2]
------------------------------------------------------------------------
                                                           Billion 2022$
------------------------------------------------------------------------
                            3% discount rate
------------------------------------------------------------------------
Consumer Operating Cost Savings.........................             198
Climate Benefits *......................................              25
Health Benefits **......................................              49
Total Monetized Benefits [dagger].......................             271
Consumer Incremental Product Costs [Dagger].............              36
Net Monetized Benefits..................................             235
Change in Producer Cashflow (INPV [dagger][dagger]).....       (0.2)-0.2
------------------------------------------------------------------------
                            7% discount rate
------------------------------------------------------------------------
Consumer Operating Cost Savings.........................              75
Climate Benefits * (3% discount rate)...................              25
Health Benefits **......................................              17
Total Monetized Benefits [dagger].......................             117
Consumer Incremental Product Costs [Dagger].............              19
Net Monetized Benefits..................................              98

[[Page 49063]]

 
Change in Producer Cashflow (INPV [dagger][dagger]).....       (0.2)-0.2
------------------------------------------------------------------------
Note: This table presents the monetized costs and benefits associated
  with consumer water heaters shipped in 2030-2059. These results
  include benefits to consumers which accrue after 2059 from the
  products shipped in 2030-2059.
* Climate benefits are calculated using four different estimates of the
  social cost of carbon (SC-CO2), methane (SC-CH4), and nitrous oxide
  (SC-N2O) (model average at 2.5-percent, 3-percent, and 5-percent
  discount rates; 95th percentile at 3-percent discount rate) (see
  section IV.L of this document). Together these represent the global SC-
  GHG. For presentational purposes of this table, the climate benefits
  associated with the average SC-GHG at a 3-percent discount rate are
  shown, but DOE does not have a single central SC-GHG point estimate.
  To monetize the benefits of reducing greenhouse gas emissions this
  analysis uses the interim estimates presented in the Technical Support
  Document: Social Cost of Carbon, Methane, and Nitrous Oxide Interim
  Estimates Under Executive Order 13990 published in February 2021 by
  the Interagency Working Group on the Social Cost of Greenhouse Gases
  (IWG).
** Health benefits are calculated using benefit-per-ton values for NOX
  and SO2. DOE is currently only monetizing (for SO2 and NOX) PM2.5
  precursor health benefits and (for NOX) ozone precursor health
  benefits, but will continue to assess the ability to monetize other
  effects such as health benefits from reductions in direct PM2.5
  emissions. See section IV.L of this document for more details.
[dagger] Total and net benefits include those consumer, climate, and
  health benefits that can be quantified and monetized. For presentation
  purposes, total and net benefits for both the 3-percent and 7-percent
  cases are presented using the average SC-GHG with 3-percent discount
  rate, but DOE does not have a single central SC-GHG point estimate.
  DOE emphasizes the importance and value of considering the benefits
  calculated using all four sets of SC-GHG estimates.
[Dagger] Costs include incremental equipment costs as well as
  installation costs.
[dagger][dagger] Operating Cost Savings are calculated based on the life
  cycle costs analysis and national impact analysis as discussed in
  detail below. See sections IV.F and IV.H. DOE's NIA includes all
  impacts (both costs and benefits) along the distribution chain
  beginning with the increased costs to the manufacturer to manufacture
  the product and ending with the increase in price experienced by the
  consumer. DOE also separately conducts a detailed analysis on the
  impacts on manufacturers (the MIA). See section IV.J. In the detailed
  MIA, DOE models manufacturers' pricing decisions based on assumptions
  regarding investments, conversion costs, cashflow, and margins. The
  MIA produces a range of impacts, which is the rule's expected impact
  on the industry net present value (INPV). The change in industry NPV
  is the present value of all changes in industry cash flow, including
  changes in production costs, capital expenditures, and manufacturer
  profit margins. Change in INPV is calculated using the industry
  weighted average cost of capital value of 9.6% that is estimated in
  the manufacturer impact analysis (see chapter 12 of the NOPR TSD for a
  complete description of the industry weighted average cost of
  capital). For consumer water heaters, those values are -$207 million
  and $166 million. DOE accounts for that range of likely impacts in
  analyzing whether a TSL is economically justified. See section V.A of
  this document. DOE is presenting the range of impacts to the industry
  net present value under two markup scenarios: the Preservation of
  Gross Margin scenario, which is the manufacturer markup scenario used
  in the calculation of Consumer Operating Cost Savings in this table,
  and the Preservation of Operating Profit Markup scenario, where DOE
  assumed manufacturers would not be able to increase per-unit operating
  profit in proportion to increases in manufacturer production costs.
  DOE includes the range of estimated INPV in the above table, drawing
  on the MIA explained further in Section IV.J, to provide additional
  context for assessing the estimated impacts of this proposal to
  society, including potential changes in production and consumption,
  which is consistent with OMB's Circular A-4 and E.O. 12866. If DOE
  were to include the industry net present value into the net benefit
  calculation for this proposed rule, the net benefits would be $235
  billion at 3-percent discount rate and $98 billion at 7-percent
  discount rate. DOE seeks comment on this approach.

    The benefits and costs of the proposed standards can also be 
expressed in terms of annualized values. The monetary values for the 
total annualized net benefits are (1) the reduced consumer operating 
costs, minus (2) the increase in product purchase prices and 
installation costs, plus (3) the monetized value of climate and health 
benefits of emission reductions, all annualized.\11\
---------------------------------------------------------------------------

    \11\ To convert the time-series of costs and benefits into 
annualized values, DOE calculated a present value in 2022, the year 
used for discounting the NPV of total consumer costs and savings. 
For the benefits, DOE calculated a present value associated with 
each year's shipments in the year in which the shipments occur 
(e.g., 2030), and then discounted the present value from each year 
to 2022. Using the present value, DOE then calculated the fixed 
annual payment over a 30-year period, starting in the compliance 
year, that yields the same present value.
---------------------------------------------------------------------------

    The national operating cost savings are domestic private U.S. 
consumer monetary savings that occur as a result of purchasing the 
covered products and are measured for the lifetime of consumer water 
heaters shipped in 2030-2059. The benefits associated with reduced 
emissions achieved as a result of the proposed standards are also 
calculated based on the lifetime of consumer water heaters shipped in 
2030-2059. Total benefits for both the 3-percent and 7-percent cases 
are presented using the average GHG social costs with 3-percent 
discount rate. Estimates of SC-GHG values are presented for all four 
discount rates in section IV.L.1 of this document.
    Table I.4 presents the total estimated monetized benefits and costs 
associated with the proposed standard, expressed in terms of annualized 
values. The results under the primary estimate are as follows.
    Using a 7-percent discount rate for consumer benefits and costs and 
health benefits from reduced NOX and SO2 
emissions, and the 3-percent discount rate case for climate benefits 
from reduced GHG emissions, the estimated cost of the standards 
proposed in this rule is $2,235 million per year in increased equipment 
costs, while the estimated annual benefits are $7,876 million in 
reduced equipment operating costs, $1,429 million in monetized climate 
benefits, and $1,805 million in monetized health benefits. In this 
case, the net monetized benefit would amount to $8,875 million per 
year.
    Using a 3-percent discount rate for all benefits and costs, the 
estimated cost of the proposed standards is $2,420 million per year in 
increased equipment costs, while the estimated annual benefits are 
$11,357 million in reduced operating costs, $1,429 million in monetized 
climate benefits, and $2,798 million in monetized health benefits. In 
this case, the net monetized benefit would amount to $13,164 million 
per year.

[[Page 49064]]



  Table I.4--Annualized Benefits and Costs of Proposed Energy Conservation Standards for Consumer Water Heaters
                                                     [TSL 2]
----------------------------------------------------------------------------------------------------------------
                                                                                Billion 2022$/year
                                                                 -----------------------------------------------
                                                                                     Low-net-        High-net-
                                                                      Primary        benefits        benefits
                                                                     estimate        estimate        estimate
----------------------------------------------------------------------------------------------------------------
                                                3% discount rate
----------------------------------------------------------------------------------------------------------------
Consumer Operating Cost Savings.................................          11.357          10.633          12.096
Climate Benefits *..............................................           1.429           1.412           1.446
Health Benefits **..............................................           2.798           2.764           2.832
Total Monetized Benefits [dagger]...............................          15.584          14.809          16.374
Consumer Incremental Product Costs [Dagger].....................           2.420           2.488           2.356
Net Monetized Benefits..........................................          13.164          12.321          14.018
Change in Producer Cashflow (INPV [dagger][dagger]).............   (0.021)-0.017   (0.021)-0.017   (0.021)-0.017
----------------------------------------------------------------------------------------------------------------
                                                7% discount rate
----------------------------------------------------------------------------------------------------------------
Consumer Operating Cost Savings.................................           7.876           7.380           8.382
Climate Benefits * (3% discount rate)...........................           1.429           1.412           1.446
Health Benefits **..............................................           1.805           1.784           1.825
Total Monetized Benefits [dagger]...............................          11.110          10.576          11.653
Consumer Incremental Product Costs [Dagger].....................           2.235           2.290           2.183
Net Monetized Benefits..........................................           8.875           8.286           9.470
Change in Producer Cashflow (INPV [dagger][dagger]).............   (0.021)-0.017   (0.021)-0.017   (0.021)-0.017
----------------------------------------------------------------------------------------------------------------
Note: This table presents the costs and benefits associated with consumer water heaters shipped in 2030-2059.
  These results include benefits to consumers which accrue after 2059 from the products shipped in 2030-2059.
  The Primary, Low Net Benefits, and High Net Benefits Estimates utilize projections of energy prices from the
  AEO2023 Reference case, Low Economic Growth case, and High Economic Growth case, respectively. In addition,
  incremental equipment costs reflect a medium decline rate in the Primary Estimate, a low decline rate in the
  Low Net Benefits Estimate, and a high decline rate in the High Net Benefits Estimate. The methods used to
  derive projected price trends are explained in sections IV.F.1 and IV.F.4 of this document. Note that the
  Benefits and Costs may not sum to the Net Benefits due to rounding.
* To monetize the benefits of reducing greenhouse gas emissions this analysis uses the interim estimates
  presented in the Technical Support Document: Social Cost of Carbon, Methane, and Nitrous Oxide Interim
  Estimates Under Executive Order 13990 published in February 2021 by the Interagency Working Group on the
  Social Cost of Greenhouse Gases (IWG). Climate benefits are calculated using four different estimates of the
  global SC-GHG (see section IV.L of this document). For presentational purposes of this table, the climate
  benefits associated with the average SC-GHG at a 3-percent discount rate are shown, but the Department does
  not have a single central SC-GHG point estimate, and it emphasizes the importance and value of considering the
  benefits calculated using all four sets of SC-GHG estimates.
** Health benefits are calculated using benefit-per-ton values for NOX and SO2. DOE is currently only monetizing
  (for SO2 and NOX) PM2.5 precursor health benefits and (for NOX) ozone precursor health benefits, but will
  continue to assess the ability to monetize other effects such as health benefits from reductions in direct
  PM2.5 emissions. See section IV.L of this document for more details.
[dagger] Total benefits for both the 3-percent and 7-percent cases are presented using the average SC-GHG with 3-
  percent discount rate, but the Department does not have a single central SC-GHG point estimate.
[Dagger] Costs include incremental equipment costs as well as installation costs.
[dagger][dagger] Operating Cost Savings are calculated based on the life cycle costs analysis and national
  impact analysis as discussed in detail below. See sections IV.F and IV.H of this document. DOE's NIA includes
  all impacts (both costs and benefits) along the distribution chain beginning with the increased costs to the
  manufacturer to manufacture the product and ending with the increase in price experienced by the consumer. DOE
  also separately conducts a detailed analysis on the impacts on manufacturers (the MIA). See section IV.J. In
  the detailed MIA, DOE models manufacturers' pricing decisions based on assumptions regarding investments,
  conversion costs, cashflow, and margins. The MIA produces a range of impacts, which is the rule's expected
  impact on the industry net present value (INPV). The change in industry NPV is the present value of all
  changes in industry cash flow, including changes in production costs, capital expenditures, and manufacturer
  profit margins. Change in INPV is calculated using the industry weighted average cost of capital value of 9.6%
  that is estimated in the manufacturer impact analysis (see chapter 12 of the NOPR TSD for a complete
  description of the industry weighted average cost of capital). For consumer water heaters, those values are -
  $21 million and $17 million. DOE accounts for that range of likely impacts in analyzing whether a TSL is
  economically justified. See section V.A of this document. DOE is presenting the range of impacts to the
  industry net present value under two markup scenarios: the Preservation of Gross Margin scenario, which is the
  manufacturer markup scenario used in the calculation of Consumer Operating Cost Savings in this table, and the
  Preservation of Operating Profit Markup scenario, where DOE assumed manufacturers would not be able to
  increase per-unit operating profit in proportion to increases in manufacturer production costs. DOE includes
  the range of estimated INPV in the above table, drawing on the MIA explained further in Section IV.J, to
  provide additional context for assessing the estimated impacts of this proposal to society, including
  potential changes in production and consumption, which is consistent with OMB's Circular A-4 and E.O. 12866.
  If DOE were to include the industry net present value into the net benefit calculation for this proposed rule,
  the net benefits would range from $13.143 billion to $13.181 billion at 3-percent discount rate and range from
  $8.854 billion to $8.892 billion at 7-percent discount rate. DOE seeks comment on this approach.

    DOE's analysis of the national impacts of the proposed standards is 
described in sections IV.H, IV.K and IV.L of this document.

D. Conclusion

    DOE has tentatively concluded that the proposed standards represent 
the maximum improvement in energy efficiency that is technologically 
feasible and economically justified, and would result in the 
significant conservation of energy. Specifically, with regards to 
technological feasibility, products achieving these proposed standard 
levels are already commercially available for all product classes 
covered by this proposal. As for economic justification, DOE's analysis 
shows that the benefits of the proposed standards exceed the burdens of 
the proposed standards.
    Using a 7-percent discount rate for consumer benefits and costs and 
NOX and SO2 reduction benefits, and a 3-percent 
discount rate case for GHG social costs, the estimated cost of the 
proposed standards for consumer water heaters is $2,235 million per 
year in increased product costs, while the

[[Page 49065]]

estimated annual benefits are $7,876 million in reduced product 
operating costs, $1,429 million in monetized climate benefits and 
$1,805 million in monetized health benefits. The net monetized benefit 
amounts to $8,875 million per year.
    The significance of energy savings offered by a new or amended 
energy conservation standard cannot be determined without knowledge of 
the specific circumstances surrounding a given rulemaking.\12\ For 
example, some covered products and equipment have substantial energy 
consumption occur during periods of peak energy demand. The impacts of 
these products on the energy infrastructure can be more pronounced than 
products with relatively constant demand. Accordingly, DOE evaluates 
the significance of energy savings on a case-by-case basis.
---------------------------------------------------------------------------

    \12\ Procedures, Interpretations, and Policies for Consideration 
in New or Revised Energy Conservation Standards and Test Procedures 
for Consumer Products and Commercial/Industrial Equipment, 86 FR 
70892, 70901 (Dec. 13, 2021).
---------------------------------------------------------------------------

    As previously mentioned, the standards are projected to result in 
estimated national energy savings of 27 quad FFC. In addition, they are 
projected to reduce CO2 emissions by 501 Mt, the equivalent 
of the annual CO2 emissions of 2.1 million homes over 30 
years. Based on these findings, DOE has initially determined the energy 
savings from the proposed standard levels are ``significant'' within 
the meaning of 42 U.S.C. 6295(o)(3)(B). A more detailed discussion of 
the basis for these tentative conclusions is contained in the remainder 
of this document and the accompanying technical support document 
(``TSD'').
    DOE also considered more-stringent energy efficiency levels as 
potential standards, and is still considering them in this rulemaking. 
However, DOE has tentatively concluded that the potential burdens of 
the more-stringent energy efficiency levels would outweigh the 
projected benefits.
    Based on consideration of the public comments DOE receives in 
response to this document and related information collected and 
analyzed during the course of this rulemaking effort, DOE may adopt 
energy efficiency levels presented in this document that are either 
higher or lower than the proposed standards, or some combination of 
level(s) that incorporate the proposed standards in part.

II. Introduction

    The following section briefly discusses the statutory authority 
underlying this proposed rule, as well as some of the relevant 
historical background related to the establishment of standards for 
consumer water heaters.

A. Authority

    EPCA authorizes DOE to regulate the energy efficiency of a number 
of consumer products and certain industrial equipment. Title III, Part 
B of EPCA established the Energy Conservation Program for Consumer 
Products Other Than Automobiles. These products include consumer water 
heaters, the subject of this document. (42 U.S.C. 6292(a)(4))
    EPCA prescribed energy conservation standards for these products 
(42 U.S.C. 6295(e)(1)), and directed DOE to conduct two cycles of 
rulemakings \13\ to determine whether to amend these standards. (42 
U.S.C. 6295(e)(4)) EPCA further provides that, not later than 6 years 
after the issuance of any final rule establishing or amending a 
standard, DOE must publish either a notice of determination that 
standards for the product do not need to be amended, or a NOPR 
including new proposed energy conservation standards (proceeding to a 
final rule, as appropriate). (42 U.S.C. 6295(m)(1))
---------------------------------------------------------------------------

    \13\ DOE completed the first of these rulemaking cycles on 
January 17, 2001, by publishing in the Federal Register a final rule 
amending the energy conservation standards for consumer water 
heaters. 66 FR 4474. Subsequently, DOE completed the second 
rulemaking cycle to amend the standards for consumer water heaters 
by publishing a final rule in the Federal Register on April 16, 
2010. 75 FR 20112.
---------------------------------------------------------------------------

    The energy conservation program under EPCA consists essentially of 
four parts: (1) testing, (2) labeling, (3) the establishment of Federal 
energy conservation standards, and (4) certification and enforcement 
procedures. Relevant provisions of EPCA specifically include 
definitions (42 U.S.C. 6291), test procedures (42 U.S.C. 6293), 
labeling provisions (42 U.S.C. 6294), energy conservation standards (42 
U.S.C. 6295), and the authority to require information and reports from 
manufacturers (42 U.S.C. 6296).
    Federal energy efficiency requirements for covered products 
established under EPCA generally supersede State laws and regulations 
concerning energy conservation testing, labeling, and standards. (42 
U.S.C. 6297(a)-(c)) DOE may, however, grant waivers of Federal 
preemption for particular State laws or regulations, in accordance with 
the procedures and other provisions set forth under EPCA. (See 42 
U.S.C. 6297(d))
    Subject to certain criteria and conditions, DOE is required to 
develop test procedures to measure the energy efficiency, energy use, 
or estimated annual operating cost of each covered product. (42 U.S.C. 
6295(o)(3)(A) and 42 U.S.C. 6295(r)) Manufacturers of covered products 
must use the prescribed DOE test procedure as the basis for certifying 
to DOE that their products comply with the applicable energy 
conservation standards adopted under EPCA and when making 
representations to the public regarding the energy use or efficiency of 
those products. (42 U.S.C. 6293(c) and 42 U.S.C. 6295(s)) Similarly, 
DOE must use these test procedures to determine whether the products 
comply with standards adopted pursuant to EPCA. (42 U.S.C. 6295(s)) The 
DOE test procedures for consumer water heaters appear at title 10 of 
the Code of Federal Regulations (``CFR'') part 430, subpart B, appendix 
E (``appendix E'').
    DOE must follow specific statutory criteria for prescribing new or 
amended standards for covered products, including consumer water 
heaters. Any new or amended standard for a covered product must be 
designed to achieve the maximum improvement in energy efficiency that 
the Secretary of Energy determines is technologically feasible and 
economically justified. (42 U.S.C. 6295(o)(2)(A) and 42 U.S.C. 
6295(o)(3)(B)) Furthermore, DOE may not adopt any standard that would 
not result in the significant conservation of energy. (42 U.S.C. 
6295(o)(3))
    Moreover, DOE may not prescribe a standard: (1) for certain 
products, including consumer water heaters, if no test procedure has 
been established for the product, or (2) if DOE determines by rule that 
the standard is not technologically feasible or economically justified. 
(42 U.S.C. 6295(o)(3)(A)-(B)) In deciding whether a proposed standard 
is economically justified, DOE must determine whether the benefits of 
the standard exceed its burdens. (42 U.S.C. 6295(o)(2)(B)(i)) DOE must 
make this determination after receiving comments on the proposed 
standard, and by considering, to the greatest extent practicable, the 
following seven statutory factors:

    (1) The economic impact of the standard on manufacturers and 
consumers of the products subject to the standard;
    (2) The savings in operating costs throughout the estimated 
average life of the covered products 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 from the 
standard;
    (3) The total projected amount of energy (or as applicable, 
water) savings likely to result directly from the standard;

[[Page 49066]]

    (4) Any lessening of the utility or the performance of the 
covered products likely to result from 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 
standard;
    (6) The need for national energy and water conservation; and
    (7) Other factors the Secretary of Energy (``Secretary'') 
considers relevant.

(42 U.S.C. 6295(o)(2)(B)(i)(I)-(VII))
    Further, EPCA establishes a rebuttable presumption that a standard 
is economically justified if the Secretary finds that the additional 
cost to the consumer of purchasing a product complying with an energy 
conservation standard level will be less than three times the value of 
the energy savings that the consumer will receive during the first year 
as a result of the standard, as calculated under the applicable test 
procedure. (42 U.S.C. 6295(o)(2)(B)(iii))
    EPCA also contains what is known as an ``anti-backsliding'' 
provision, which prevents the Secretary from prescribing any amended 
standard that either increases the maximum allowable energy use or 
decreases the minimum required energy efficiency of a covered product. 
(42 U.S.C. 6295(o)(1)) Also, the Secretary may not prescribe an amended 
or new standard if interested persons have established by a 
preponderance of the evidence that the standard is likely to result in 
the unavailability in the United States in any covered product type (or 
class) of performance characteristics (including reliability), 
features, sizes, capacities, and volumes that are substantially the 
same as those generally available in the United States. (42 U.S.C. 
6295(o)(4))
    Additionally, EPCA specifies requirements when promulgating an 
energy conservation standard for a covered product that has two or more 
subcategories. DOE must specify a different standard level for a type 
or class of product that has the same function or intended use if DOE 
determines that products within such group: (A) consume a different 
kind of energy from that consumed by other covered products within such 
type (or class); or (B) have a capacity or other performance-related 
feature which other products within such type (or class) do not have 
and such feature justifies a higher or lower standard. (42 U.S.C. 
6295(q)(1)) In determining whether a performance-related feature 
justifies a different standard for a group of products, DOE must 
consider such factors as the utility to the consumer of the feature and 
other factors DOE deems appropriate. Id. Any rule prescribing such a 
standard must include an explanation of the basis on which such higher 
or lower level was established. (42 U.S.C. 6295(q)(2))
    Finally, pursuant to the amendments contained in the Energy 
Independence and Security Act of 2007 (``EISA 2007''), Public Law 110-
140, any final rule for new or amended energy conservation standards 
promulgated after July 1, 2010, is required to address standby mode and 
off mode energy use. (42 U.S.C. 6295(gg)(3)) Specifically, when DOE 
adopts a standard for a covered product after that date, it must, if 
justified by the criteria for adoption of standards under EPCA (42 
U.S.C. 6295(o)), incorporate standby mode and off mode energy use into 
a single standard, or, if that is not feasible, adopt a separate 
standard for such energy use for that product. (42 U.S.C. 
6295(gg)(3)(A)-(B)) DOE's current test procedures for consumer water 
heaters address standby mode and off mode energy use. In this 
rulemaking, DOE is proposing to apply the UEF metric (which addresses 
standby mode and off mode energy use) to all product classes of 
consumer water heaters, including those product classes for which there 
are no currently applicable UEF-based standards.

B. Background

1. Current Standards
    As directed by EPCA (42 U.S.C. 6295(e)(4)), DOE conducted two 
cycles of rulemakings to determine whether to amend the statutory 
standards for consumer water heaters found in 42 U.S.C. 6295(e)(1). The 
most recent rulemaking from April 2010 resulted in amended standards 
using the energy factor (``EF'') metric originally prescribed by EPCA 
with a requirement for compliance starting on April 16, 2015. 75 FR 
20112 (the ``April 2010 Final Rule''). Later amendments to EPCA 
directed DOE to establish a uniform efficiency metric for consumer 
water heaters (see 42 U.S.C. 6295(e)(5)(B)).\14\ The Federal test 
procedure was revised to use a new metric, UEF, in a final rule 
published on July 11, 2014. 79 FR 40542. In a final rule published in 
the Federal Register on December 29, 2016, the existing EF-based energy 
conservation standards were then translated from EF to UEF using a 
``conversion factor'' method for water heater basic models that were in 
existence at the time. 81 FR 96204 (``December 2016 Conversion Factor 
Final Rule'').
---------------------------------------------------------------------------

    \14\ The requirement for a consumer water heater test procedure 
using uniform energy factor as a metric, as well as the requirement 
for DOE to undertake a conversion factor rulemaking to translate 
existing consumer water heater standards denominated in terms of EF 
to ones denominated in terms of UEF, were part of the amendments to 
EPCA contained in the American Energy Manufacturing Technical 
Corrections Act (AEMTCA), Public Law 112-210 (Dec. 18, 2012).
---------------------------------------------------------------------------

    These standards are set forth in DOE's regulations at 10 CFR 
430.32(d) and are repeated in Table II.1.

         Table II.1--Current UEF-Based Federal Energy Conservation Standards for Consumer Water Heaters
----------------------------------------------------------------------------------------------------------------
                                     Rated storage volume
           Product class             and input rating (if        Draw pattern *         Uniform energy factor **
                                         applicable)
----------------------------------------------------------------------------------------------------------------
Gas-fired Storage Water Heater....  >=20 gal and <=55 gal  Very Small................      0.3456-(0.0020 x Vr)
                                                           Low.......................      0.5982-(0.0019 x Vr)
                                                           Medium....................      0.6483-(0.0017 x Vr)
                                                           High......................      0.6920-(0.0013 x Vr)
                                    >55 gal and <=100 gal  Very Small................      0.6470-(0.0006 x Vr)
                                                           Low.......................      0.7689-(0.0005 x Vr)
                                                           Medium....................      0.7897-(0.0004 x Vr)
                                                           High......................      0.8072-(0.0003 x Vr)
Oil-fired Storage Water Heater....  <=50 gal.............  Very Small................      0.2509-(0.0012 x Vr)
                                                           Low.......................      0.5330-(0.0016 x Vr)
                                                           Medium....................      0.6078-(0.0016 x Vr)
                                                           High......................      0.6815-(0.0014 x Vr)
Electric Storage Water Heaters....  >=20 gal and <=55 gal  Very Small................      0.8808-(0.0008 x Vr)
                                                           Low.......................      0.9254-(0.0003 x Vr)

[[Page 49067]]

 
                                                           Medium....................      0.9307-(0.0002 x Vr)
                                                           High......................      0.9349-(0.0001 x Vr)
                                    >55 gal and <=120 gal  Very Small................      1.9236-(0.0011 x Vr)
                                                           Low.......................      2.0440-(0.0011 x Vr)
                                                           Medium....................      2.1171-(0.0011 x Vr)
                                                           High......................      2.2418-(0.0011 x Vr)
Tabletop Water Heater.............  >=20 gal and <=120     Very Small................      0.6323-(0.0058 x Vr)
                                     gal.
                                                           Low.......................      0.9188-(0.0031 x Vr)
                                                           Medium....................      0.9577-(0.0023 x Vr)
                                                           High......................      0.9884-(0.0016 x Vr)
Instantaneous Gas-fired Water       <2 gal and >50,000     Very Small................                      0.80
 Heater.                             Btu/h.
                                                           Low.......................                      0.81
                                                           Medium....................                      0.81
                                                           High......................                      0.81
Instantaneous Electric Water        <2 gal...............  Very Small................                      0.91
 Heater.
                                                           Low.......................                      0.91
                                                           Medium....................                      0.91
                                                           High......................                      0.92
Grid-enabled Water Heater.........  >75 gal..............  Very Small................      1.0136-(0.0028 x Vr)
                                                           Low.......................      0.9984-(0.0014 x Vr)
                                                           Medium....................      0.9853-(0.0010 x Vr)
                                                           High......................      0.9720-(0.0007 x Vr)
----------------------------------------------------------------------------------------------------------------
* The draw pattern dictates the frequency and duration of hot water draws during the 24-hour simulated use test,
  and is an indicator of delivery capacity of the water heater. Draw patterns are assigned based on the first
  hour rating (``FHR''), for non-flow-activated water heaters, or maximum GPM rating (``Max GPM''), for flow-
  activated water heaters. For the specific FHR and Max GPM ranges which correspond to each draw pattern, see
  section 5.4.1 of appendix E to subpart B of 10 CFR part 430.
** Vr is the rated storage volume (in gallons), as determined pursuant to 10 CFR 429.17.

    In the December 2016 Conversion Factor Final Rule, DOE declined to 
develop conversion factors and UEF-based standards for consumer water 
heaters of certain sizes (by rated storage volume or input rating) and 
of certain types (i.e., oil-fired instantaneous water heaters) where 
models did not exist on the market at the time to inform the analysis 
of the standards conversion. 81 FR 96204, 96210-96211. For consumer 
water heaters that did not receive converted UEF-based standards, DOE 
provided its interpretation that the original statutory standards--
found at 42 U.S.C. 6295(e)(1) and expressed in terms of the EF metric--
still applied; however, DOE would not enforce those statutorily-
prescribed standards until such a time conversion factors are developed 
for these products and they can be converted to UEF. Id. Thus, the EF-
based standards specified by EPCA apply to any consumer water heaters 
which do not have UEF-based standards found at 10 CFR 430.32(d). These 
EF-based standards are set forth at 42 U.S.C. 6295(e)(1) and are 
repeated in Table II.2.

 Table II.2--EF-Based Federal Energy Conservation Standards for Consumer
                              Water Heaters
------------------------------------------------------------------------
          Product class                       Energy factor *
------------------------------------------------------------------------
Gas water heaters................  0.62-(0.0019 x Vr)
Oil water heaters................  0.59-(0.0019 x Vr)
Electric water heaters...........  0.95-(0.00132 x Vr)
------------------------------------------------------------------------
* Vr is the rated storage volume (in gallons), as determined pursuant to
  10 CFR 429.17.

2. History of the Current Standards Rulemaking for Consumer Water 
Heaters
    On May 21, 2020, DOE initiated the current rulemaking by publishing 
in the Federal Register a request for information (``May 2020 RFI''), 
soliciting public comment on various aspects of DOE's planned analyses 
to help DOE determine whether to amend energy conservation standards 
for consumer water heaters. 85 FR 30853 (May 21, 2020). DOE 
subsequently published a notice requesting feedback on its preliminary 
analysis and technical support document (``preliminary TSD'') on March 
1, 2022 (the ``March 2022 Preliminary Analysis'') with a 60-day comment 
period. 87 FR 11327 (Mar. 1, 2022). The comment period was extended by 
14 days in a notice published on May 4, 2022. 87 FR 26303. DOE received 
comments in response to the preliminary analysis notice and 
accompanying technical support document from the interested parties 
listed in Table II.3.
    On October 21, 2022, DOE received a set of recommendations on 
amended energy conservation standards for consumer water heaters from a 
coalition of public- and private-sector organizations, including water 
heater manufacturers, energy efficiency organizations, environmental 
groups, and consumer organizations--collectively the Joint 
Stakeholders. This coalition's submission is herein referred to as the 
``Joint Recommendation.'' The Joint Recommendation addressed standards 
for electric storage water heaters, gas-fired storage water heaters,

[[Page 49068]]

and gas-fired instantaneous water heaters and is discussed in further 
detail in section III.F of this document.

                       Table II.3--Preliminary Analysis and Joint Recommendation Comments
----------------------------------------------------------------------------------------------------------------
                                                                      Comment No.  in the
            Commenter(s)                     Abbreviation                  docket *             Commenter type
----------------------------------------------------------------------------------------------------------------
American Council for an Energy-      Joint Stakeholders..........  49......................  Efficiency
 Efficient Economy, Appliance                                                                 Organizations,
 Standards Awareness Project,                                                                 Manufacturers,
 Bradford White Corporation,                                                                  Consumer Advocacy
 Consumer Federation of America,                                                              Organization.
 Natural Resources Defense Council,
 Northwest Energy Efficiency
 Alliance, Rheem Manufacturing
 Company.
Air-Conditioning, Heating and        AHRI........................  20, 31, 42..............  Trade Association.
 Refrigeration Institute.
Anonymous..........................  Anonymous...................  19......................  Individual.
Atmos Energy Corporation...........  Atmos.......................  27, 38..................  Utility.
Bradford White Corporation.........  BWC.........................  32......................  Manufacturer.
California Investor-Owned Utilities  CA IOUs.....................  31, 39, 52..............  Utility
 (Pacific Gas and Electric Company,                                                           Association.
 Southern California Edison, San
 Diego Gas & Electric Company).
Center for Energy and Environment..  CEE.........................  50......................  Efficiency
                                                                                              Organization.
Benjamin Cirker....................  Cirker......................  30......................  Individual.
Edison Electric Institute..........  EEI.........................  31, 43..................  Utility
                                                                                              Association.
The American Gas Association,        Gas Association Commenters..  26, 41, 54..............  Utility
 American Public Gas Association,                                                             Association.
 National Propane Gas Association,
 Spire Inc., Spire Missouri Inc.,
 and Spire Alabama Inc..
GE Appliances......................  GEA.........................  46......................  Manufacturer.
Gas End-Use Advocacy Group.........  GEAG........................  36......................  Utility
                                                                                              Association.
Appliance Standards Awareness        Joint Advocates.............  34......................  Efficiency
 Project, American Council for an                                                             Organization.
 Energy-Efficient Economy,
 California Energy Commission,
 Consumer Federation of America,
 National Consumer Law Center,
 Natural Resources Defense Council
 and Northeast Energy Efficiency
 Partnerships.
Northwest Energy Efficiency          NEEA, ACEEE, and NWPCC......  47......................  Efficiency
 Alliance, American Council for an                                                            Organization.
 Energy-Efficient Economy,
 Northwest Power and Conservation
 Council.
Northwest Energy Efficiency          NEEA........................  31......................  Efficiency
 Alliance.                                                                                    Organization.
Natural Resources Defense Council    NRDC and RMI................  37......................  Efficiency
 and Rocky Mountain Institute.                                                                Organization.
National Rural Electric Cooperative  NRECA.......................  33......................  Utility
 Association.                                                                                 Association.
New York State Energy Research and   NYSERDA.....................  35, 51..................  Efficiency
 Development Authority.                                                                       Organization.
ONE Gas Inc........................  ONE Gas.....................  28, 44..................  Utility.
Plumbing-Heating-Cooling             PHCC........................  40......................  Trade Association.
 Contractors Association.
Rheem Manufacturing Company........  Rheem.......................  45......................  Manufacturer.
Rinnai America Corporation.........  Rinnai......................  55......................  Manufacturer.
Southern Company...................  Southern Company............  31......................  Manufacturer.
Southwest Energy Efficiency Project  SWEEP.......................  53......................  Efficiency
                                                                                              Organization.
Eriks Mota Vasquez.................  Vasquez.....................  17......................  Individual.
----------------------------------------------------------------------------------------------------------------
*Comment No. 31 denotes comments recorded in the transcript of the public meeting held on April 12, 2022.

    A parenthetical reference at the end of a comment quotation or 
paraphrase provides the location of the item in the public record.\15\ 
To the extent that interested parties have provided written comments 
that are substantively consistent with any oral comments provided 
during the April 12, 2022 public meeting, DOE cites the written 
comments throughout this final rule. Any oral comments provided during 
the webinar that are not substantively addressed by written comments 
are summarized and cited separately throughout this final rule.
---------------------------------------------------------------------------

    \15\ The parenthetical reference provides a reference for 
information located in the docket of DOE's rulemaking to develop 
energy conservation standards for consumer water heaters. (Docket 
No. EERE-2017-BT-STD-0019, which is maintained at 
www.regulations.gov). The references are arranged as follows: 
(commenter name, comment docket ID number, page of that document).
---------------------------------------------------------------------------

C. Deviation From Appendix A

    In accordance with section 3(a) of 10 CFR part 430, subpart C, 
appendix A (``appendix A''), DOE has deviated from the provision in 
appendix A regarding the pre-NOPR stages for an energy conservation 
standards rulemaking (specifically, the publication of a framework 
document). As initially discussed in the March 2022 Preliminary 
Analysis, DOE opted to deviate from this step by publishing a 
preliminary analysis without a framework document. A framework document 
is intended to introduce and summarize the various analyses DOE 
conducts during the rulemaking process and requests initial feedback 
from interested parties. Prior to the notification of the preliminary 
analysis DOE published an RFI in which DOE identified and sought 
comment on the analyses conducted in support of the most recent energy 
conservation standards rulemakings for water heaters. 87 FR 11327, 
11330.
    For this NOPR, DOE further notes that it is deviating from the 
provision in appendix A regarding the NOPR stage for an energy 
conservation standards rulemaking. Section 6(f)(2) of appendix A 
specifies that the length of the public comment period for a NOPR will 
be not less than 75 calendar. For this NOPR, DOE has opted instead to 
provide a 60-day comment period. DOE is opting to deviate from the 75-
day comment period because stakeholders have already been afforded 
multiple opportunities to provide comments on this rulemaking. As noted 
previously, DOE requested comment on its planned technical and economic 
analyses in the May 2020 RFI and provided stakeholders with a 45-day 
comment period. 85 FR 30853. Additionally, DOE initially provided a 60-
day comment period for stakeholders to provide input on the analyses 
presented in the preliminary TSD. 87 FR 11327. Subsequently, in 
response to requests from stakeholders, DOE re-opened the comment 
period for an additional 14 days to provide additional time for 
stakeholders to provide input on the preliminary analysis. 87 FR 26303 
(May 4, 2022). The analytical assumptions and approaches used for the 
analyses conducted for this NOPR are similar to those used for the 
preliminary analysis. Therefore, DOE believes a 60-day comment period 
is appropriate and will provide interested parties with a meaningful 
opportunity to comment on the proposed rule.
    Section 8(d)(1) of appendix A requires that new or amended test 
procedures

[[Page 49069]]

which impact measured energy use or efficiency are finalized at least 
180 days prior to the close of comment period for a NOPR proposing new 
or amended energy conservation standards. However, in a final rule 
published on December 13, 2021, discussing the provisions of appendix 
A, DOE noted that this 180-day period may not always be necessary. 86 
FR 70892, 70896. The comment period for this NOPR will close on 
September 26, 2023, which is X days after the date of finalization of 
the most recent consumer and residential-duty commercial water heaters 
test procedure final rule, June 21, 2023 (this test procedure final 
rule is discussed in section III.B of this document). As described in 
that test procedure final rule, the amendments adopted therein will not 
alter the measured efficiency of consumer water heaters, or require 
retesting or recertification solely as a result of DOE's adoption of 
the amendments to the test procedures. 88 FR 40406, 40412. As such, the 
test provisions required by the most recent test procedure final rule 
are expected to be generally understood by stakeholders and would not 
impact the analysis of this standards rulemaking.

III. General Discussion

    DOE developed this proposal after considering oral and written 
comments, data, and information from interested parties that represent 
a variety of interests. The following discussion provides a general 
overview of the approach taken to develop this proposal, with specific 
discussion of the methodology and comments received in section IV of 
this document.

A. Scope of Coverage

    This NOPR covers those consumer products that meet the definition 
of ``water heater,'' as codified at 10 CFR 430.2 and as described by 
EPCA at 42 U.S.C. 6291(27).
    Generally, DOE defines a ``water heater,'' consistent with EPCA's 
definition, as a product which utilizes oil, gas, or electricity to 
heat potable water for use outside the heater upon demand, including:
    (a) Storage type units which heat and store water at a 
thermostatically controlled temperature, including gas storage water 
heaters with an input of 75,000 Btu per hour or less, oil storage water 
heaters with an input of 105,000 Btu per hour or less, and electric 
storage water heaters with an input of 12 kilowatts or less;
    (b) Instantaneous type units which heat water but contain no more 
than one gallon of water per 4,000 Btu per hour of input, including gas 
instantaneous water heaters with an input of 200,000 Btu per hour or 
less, oil instantaneous water heaters with an input of 210,000 Btu per 
hour or less, and electric instantaneous water heaters with an input of 
12 kilowatts or less; and
    (c) Heat pump type units, with a maximum current rating of 24 
amperes at a voltage no greater than 250 volts, which are products 
designed to transfer thermal energy from one temperature level to a 
higher temperature level for the purpose of heating water, including 
all ancillary equipment such as fans, storage tanks, pumps, or controls 
necessary for the device to perform its function.

10 CFR 430.2; (42 U.S.C. 6291(27))
    In addition, at 10 CFR 430.2, DOE further defines several specific 
categories of consumer water heaters, as follows:
     ``Electric instantaneous water heater'' means a water 
heater that uses electricity as the energy source, has a nameplate 
input rating of 12 kW or less, and contains no more than one gallon of 
water per 4,000 Btu per hour of input.
     ``Electric storage water heater'' means a water heater 
that uses electricity as the energy source, has a nameplate input 
rating of 12 kW or less, and contains more than one gallon of water per 
4,000 Btu per hour of input.
     ``Gas-fired instantaneous water heater'' means a water 
heater that uses gas as the main energy source, has a nameplate input 
rating less than 200,000 Btu per hour, and contains no more than one 
gallon of water per 4,000 Btu per hour of input.
     ``Gas-fired storage water heater'' means a water heater 
that uses gas as the main energy source, has a nameplate input rating 
of 75,000 Btu per hour or less, and contains more than one gallon of 
water per 4,000 Btu per hour of input.
     ``Grid-enabled water heater'' means an electric resistance 
water heater that--
    [scir] Has a rated storage tank volume of more than 75 gallons;
    [scir] Is manufactured on or after April 16, 2015;
    [scir] Is equipped at the point of manufacture with an activation 
lock; and
    [scir] Bears a permanent label applied by the manufacturer that--
    [ssquf] Is made of material not adversely affected by water;
    [ssquf] Is attached by means of non-water-soluble adhesive; and
    [ssquf] Advises purchasers and end-users of the intended and 
appropriate use of the product with the following notice printed in 
16.5 point Arial Narrow Bold font: ``IMPORTANT INFORMATION: This water 
heater is intended only for use as part of an electric thermal storage 
or demand response program. It will not provide adequate hot water 
unless enrolled in such a program and activated by your utility company 
or another program operator. Confirm the availability of a program in 
your local area before purchasing or installing this product.''
     ``Oil-fired instantaneous water heater'' means a water 
heater that uses oil as the main energy source, has a nameplate input 
rating of 210,000 Btu/h or less, and contains no more than one gallon 
of water per 4,000 Btu per hour of input.
     ``Oil-fired storage water heater'' means a water heater 
that uses oil as the main energy source, has a nameplate input rating 
of 105,000 Btu/h or less, and contains more than one gallon of water 
per 4,000 Btu per hour of input.
    In the June 2023 Test Procedure Final Rule, DOE amended 10 CFR 
430.2 (effective on July 21, 2023), adding the following definitions 
for circulating, low-temperature, and tabletop water heaters:
     ``Circulating water heater'' means an instantaneous or 
heat pump-type water heater that does not have an operational scheme in 
which the burner, heating element, or compressor initiates and/or 
terminates heating based on sensing flow; has a water temperature 
sensor located at the inlet or the outlet of the water heater or in a 
separate storage tank that is the primary means of initiating and 
terminating heating; and must be used in combination with a 
recirculating pump and either a separate storage tank or water 
circulation loop in order to achieve the water flow and temperature 
conditions recommended in the manufacturer's installation and operation 
instructions.
     ``Low-temperature water heater'' means an electric 
instantaneous water heater that is not a circulating water heater and 
cannot deliver water at a temperature greater than or equal to the set 
point temperature specified in section 2.5 of appendix E to subpart B 
of this part when supplied with water at the supply water temperature 
specified in section 2.3 of appendix E to subpart B of part 430 and the 
flow rate specified in section 5.2.2.1 of appendix E to subpart B of 
part 430.
     ``Tabletop water heater'' means a water heater in a 
rectangular box enclosure designed to slide into a kitchen countertop 
space with typical dimensions of 36 inches high, 25 inches deep, and 24 
inches wide.
    As stated in section I of this NOPR, EPCA prescribed energy 
conservation standards for all consumer water heaters (i.e., those that 
meet the definition of

[[Page 49070]]

``water heater'' above). For the purposes of this NOPR, DOE is 
considering all consumer water heaters, as defined by EPCA. This 
includes consumer water heaters for which there are no current UEF-
based standards codified at 10 CFR 430.32(d).
    However, during this rulemaking, DOE has received inquiries from 
interested parties regarding the coverage, under current energy 
conservation standards, of hot water dispensing products. These 
products are generally used for food preparation (e.g., brewing tea) 
and are installed in place of portable kettles. A small water-heating 
tank is connected to a sink's cold water supply to heat the water up to 
near-boiling temperatures. The hot water is piped out of the tank 
through a separate hot water faucet\16\ specifically for use with this 
product. These products have very limited storage volume--often less 
than one gallon. All of the models that DOE has identified are all 
electric and run on less than 2 kilowatts of power. Note that these 
products are not to be confused with low-temperature electric 
instantaneous water heaters or point-of-use electric storage water 
heaters, both of which generally provide temperatures near or below 125 
[deg]F, the nominal delivery temperature in the appendix E test 
procedure that corresponds to normal household hot water temperatures 
for washing applications. Hot water dispensing products provide water 
at scalding-hot temperatures such as 160 [deg]F to 210 [deg]F.
---------------------------------------------------------------------------

    \16\ ``Low-pressure water dispenser'' means a terminal fitting 
that dispenses drinking water at a pressure of 105 kPA (15 psi) or 
less. (10 CFR 430.2) Low-pressure water dispensers operate at lower 
water pressures than conventional kitchen faucets (by definition) 
and are used for the purpose of gently filling a relatively small 
vessel (e.g., a glass).
---------------------------------------------------------------------------

    DOE does not currently have energy conservation standards that 
cover hot water dispensing products and DOE's test procedure is not 
representative of an average use cycle for these products. Hot water 
dispensing products operate in a unique manner compared to the other 
consumer water heaters such as much higher temperatures, have smaller 
storage capacities, and can provide hot potable water at lower flow 
rates than typical consumer electric water heaters. While DOE has the 
authority to set standards for products that meet the definition of a 
consumer water heater (42 U.S.C. 6292(a)(4)), this rulemaking is not 
currently considering standards for hot water dispensing products.
    See section IV.A.1 of this document for discussion of the product 
classes analyzed in this NOPR.

B. Test Procedure

    EPCA sets forth generally applicable criteria and procedures for 
DOE's adoption and amendment of test procedures. (42 U.S.C. 6293) 
Manufacturers of covered products must use these test procedures to 
certify to DOE that their product complies with energy conservation 
standards and to quantify the efficiency of their product. DOE's 
current energy conservation standards for consumer water heaters are 
expressed in terms of UEF. (See 10 CFR 430.32(d)).
    DOE recently amended the test procedure for these products at 
appendix E to subpart B of 10 CFR 430 in the consumer and residential-
duty commercial water heater test procedure final rule published on 
June 21, 2023 (``June 2023 TP Final Rule'') pursuant to the 7-year 
review requirement as specified by EPCA. (42 U.S.C. 6293(b)(1)(A) and 
42 U.S.C. 6314(a)(1)(A)) In the June 2023 TP Final Rule, DOE added 
definitions and where necessary additional test procedure provisions 
for circulating water heaters, low-temperature water heaters, and 
tabletop water heaters, as well as provisions for high temperature 
testing. DOE also established effective storage volume as a metric and 
provided additional optional ambient test conditions for heat pump 
water heaters. The test procedure for consumer water heaters 
incorporates by reference current versions of industry standards ASHRAE 
41.1, ASHRAE 41.6, ASHRAE 118.2, ASTM D2156, and ASTM E97 and 
harmonizes various aspects of the test procedure with industry test 
procedures ASHRAE 118.2-2022 and NEEA Advanced Water Heating 
Specification v8.0. The effective date of the June 2023 TP Final Rule 
is July 21, 2023, 30 days after the date of its publication in the 
Federal Register. Changes to the test procedure made by the June 2023 
TP Final Rule are mandatory for consumer water heater testing starting 
December 18, 2023, 180 days after publication. Subsequent references in 
this NOPR to the ``appendix E test procedure'' refer to the test 
procedure which will go in effect on July 21, 2023.
    DOE received comments in response to the March 2022 Preliminary 
Analysis regarding the consumer water heater test procedure that were 
relevant to the test procedure rulemaking.
    Cirker provided comments suggesting that, based on personal in-home 
monitoring of three heat pump water heaters, different designs exhibit 
different performance (i.e., delivery temperature, delivery capacity, 
and energy consumption) under winter conditions, when the consumer uses 
a higher setpoint temperature, has a lower ambient temperature, and a 
lower supply water temperature. Cirker suggested that DOE include a 
method to determine the efficiency and first hour rating of heat pump 
water heaters under cold climate conditions. (Cirker, No. 30 at pp. 1-
2)
    In the June 2023 TP Final Rule, DOE adopted additional test 
conditions--including those simulating cold climates--for manufacturers 
to be able to make voluntary optional representations for heat pump 
water heaters. 88 FR 40406.
    NYSERDA commented that rated storage volume is no longer an 
appropriate representation of the capacity of a storage water heater 
volume due to the use of mixing valves and higher tank temperatures, 
suggesting that first hour rating (``FHR'') be used instead. (NYSERDA, 
No. 35 at p. 6) DOE agreed that increasing the temperature of the water 
stored in a water heater above the nominal delivery temperature is a 
way to increase the capacity of the water heater, as the hotter water 
can be tempered with cool water using a mixing valve to provide a 
larger volume of hot water than when the water is stored at the 
relatively cooler nominal temperature. For water heaters that are 
capable of storing water at such an elevated temperature, the effective 
storage volume metric represents a measure of the true storage capacity 
of the water heater based on the maximum temperature at which it can 
store water, as compared to storing water at the nominal temperature of 
125 degrees Fahrenheit (``[deg]F'') specified in appendix E. DOE 
agreed, therefore, that rated storage volume alone is not an adequate 
representation of the storage capacity of water heaters that are 
capable of heating and storing water at high temperatures (i.e., at a 
temperature well above the typical setpoint temperature of 125 [deg]F), 
and established effective storage volume to better represent the 
storage capacity of such water heaters in the June 2023 TP Final Rule. 
88 FR 40406. DOE specified in appendix E that effective storage volume 
is determined by multiplying the measured storage volume by a scaling 
factor which represents the ratio of the thermal energy stored in the 
tank when at its maximum storage temperature as compared to the thermal 
energy stored in the tank when at the nominal temperature of 125 
[deg]F. Id.
    The appendix E test procedure, as amended by the June 2023 TP Final 
Rule, does not require water heaters to test in the highest heat mode 
(i.e., the

[[Page 49071]]

high temperature test method). In the June 2023 TP Final Rule, DOE 
deferred the implementation of high temperature testing provisions to 
this energy conservation standards rulemaking. 88 FR 40406, 40448.
    DOE further agrees with NYSERDA that storage volume is not an 
adequate representation of the storage capacity of water heaters that 
are capable of heating and storing water at high temperatures (i.e., at 
a temperature well above the typical setpoint temperature of 125 
[deg]F). In the June 2023 TP Final Rule, DOE established effective 
storage volume as a metric to better represent the storage capacity of 
such water heaters. 88 FR 40406. Consequently, DOE is now addressing 
the implementation of effective storage volume provisions in this NOPR. 
In this NOPR, DOE is proposing that high temperature test provisions be 
required for electric storage water heaters that have a permanent 
(i.e., non-temporary) mode or setting to heat and store water above 135 
[deg]F and that do not meet the definition of ``heat pump-type'' water 
heater (i.e., this proposal applies to storage water heaters utilizing 
only electric resistance technology). Further, these provisions would 
not apply to water heaters that either store water at an elevated 
temperature only for a temporary period or to water heaters that are 
capable of storing at elevated temperatures only in response to 
instructions from a utility or third-party demand response program. DOE 
expects that, especially in the case of small electric storage water 
heaters, these products will be installed at an elevated temperature 
setpoint with a mixing valve in order to match the performance of 
larger water heaters. The high temperature test provisions are 
therefore expected to be representative of the average use cycle of 
electric resistance water heaters.
    DOE's proposal is detailed further in section V.C.1 of this 
document.
    BWC commented in response to the March 2022 Preliminary Analysis 
regarding product classes for products that do not currently have UEF-
based standards, stating that DOE refrain from considering them until 
the test procedure rulemaking is finalized and DOE determines whether 
these product classes will be necessary. BWC also noted that a study of 
the simulated use test completed by Davis Energy Group, Inc. suggests 
that EF ratings for instantaneous gas-fired water heaters are inflated 
in comparison to those for gas-fired storage water heaters. BWC 
acknowledged that this effect should be smaller for UEF ratings, but 
still urged DOE to consider its potential impact. (BWC, No. 32 at p. 6)
    In response to BWC, DOE disagrees that its test procedure provides 
an unfair advantage to gas-fired instantaneous models over gas-fired 
storage models. DOE's 24-hour simulated use test, as defined at 
appendix E, is designed to emulate typical in-field usage patterns for 
consumer water heaters and includes periods of standby during which no 
water is being withdrawn from the water heater. Storage water heaters 
maintain a significant volume of stored water, which loses heat to the 
cooler surrounding air. This results in the water heater consuming 
energy to heat the stored water to offset these standby losses, in 
addition to the energy required to heat the water from the supply water 
temperature to the setpoint temperature. By contrast, because 
instantaneous-type water heaters do not typically maintain a 
significant volume of stored water, the standby losses they experience 
are generally much lower and do not require additional energy to 
offset. Instantaneous-type water heaters may therefore achieve higher 
UEF ratings compared to storage-type water heaters. However, DOE 
reiterates that this difference in efficiency is not a result of an 
unfair test procedure, but rather a result of the differences in design 
between gas-fired storage and gas-fired instantaneous water heaters and 
is indeed representative of an average use cycle or period of use. See 
section IV.A.1 of this document for discussion regarding whether 
storage-type and instantaneous-type product classes should be combined 
together under uniform standards.
    The June 2023 TP Final Rule additionally expanded coverage of the 
appendix E test procedure to additional consumer water heaters under 
the scope of coverage of standards. As discussed in that final rule, 
DOE revised the test procedure to provide additional instructions for 
testing circulating water heaters and low-temperature water heaters for 
UEF. 88 FR 40406. A circulating water heater is defined at 10 CFR 430.2 
as an instantaneous or heat pump-type water heater that does not have 
an operational scheme in which the burner, heating element, or 
compressor initiates and/or terminates heating based on sensing flow; 
has a water temperature sensor located at the inlet or the outlet of 
the water heater or in a separate storage tank that is the primary 
means of initiating and terminating heating; and must be used in 
combination with a recirculating pump and either a separate storage 
tank or water circulation loop in order to achieve the water flow and 
temperature conditions recommended in the manufacturer's installation 
and operation instructions. A low-temperature water heater is defined 
at 10 CFR 430.2 as an electric instantaneous water heater that is not a 
circulating water heater and cannot deliver water at a temperature 
greater than or equal to the set point temperature specified in section 
2.5 of appendix E when supplied with water at the supply water 
temperature specified in section 2.3 of appendix E and the flow rate 
specified in section 5.2.2.1 of appendix E.
    Treatment of circulating water heaters and low temperature water 
heaters as potential product classes is discussed in section IV.A.1.a 
of this document.
    In response to the March 2022 Preliminary Analysis, Rinnai provided 
comments indicating that gas-fired instantaneous water heaters with 
integrated recirculating pumps may have an additional benefit to water 
conservation. (Rinnai, No. 55 at pp. 1-2) However, while DOE may 
consider the energy use associated with increased or decreased water 
use, DOE does not have the authority to establish water conservation 
standards for circulating water heaters or instantaneous water heaters. 
(See 42 U.S.C. 6291(6))

C. Technological Feasibility

1. General
    In each energy conservation standards rulemaking, DOE conducts a 
screening analysis based on information gathered on all current 
technology options and prototype designs that could improve the 
efficiency of the products or equipment that are the subject of the 
rulemaking. As the first step in such an analysis, DOE develops a list 
of technology options for consideration in consultation with 
manufacturers, design engineers, and other interested parties. DOE then 
determines which of those means for improving efficiency are 
technologically feasible. DOE considers technologies incorporated in 
commercially-available products or in working prototypes to be 
technologically feasible. Sections 6(b)(3)(i) and 7(b)(1) of appendix A 
to 10 CFR part 430 subpart C.
    After DOE has determined that particular technology options are 
technologically feasible, it further evaluates each technology option 
in light of the following additional screening criteria: (1) 
practicability to manufacture, install, and service; (2) adverse 
impacts on product utility or availability; (3) adverse impacts on

[[Page 49072]]

health or safety; and (4) unique-pathway proprietary technologies. 
Sections 6(b)(3)(ii)-(v) and 7(b)(2)-(5) of appendix A. Section IV.B of 
this document discusses the results of the screening analysis for 
consumer water heaters, particularly the designs DOE considered, those 
it screened out, and those that are the basis for the standards 
considered in this rulemaking. For further details on the screening 
analysis for this rulemaking, see chapter 4 of the NOPR TSD''.
2. Maximum Technologically Feasible Levels
    When DOE proposes to adopt an amended standard for a type or class 
of covered product, it must determine the maximum improvement in energy 
efficiency or maximum reduction in energy use that is technologically 
feasible for such product. (42 U.S.C. 6295(p)(1)) Accordingly, in the 
engineering analysis, DOE determined the maximum technologically 
feasible (``max-tech'') improvements in energy efficiency for consumer 
water heaters using the design parameters for the most efficient 
products available on the market or in working prototypes. The max-tech 
levels that DOE determined for this rulemaking are described in section 
IV.C.1.a of this proposed rule and in chapter 5 of the NOPR TSD.

D. Energy Savings

1. Determination of Savings
    For each trial standard level (``TSL''), DOE projected energy 
savings from application of the TSL to consumer water heaters purchased 
in the 30-year period that begins in the year of compliance with the 
proposed standards (2030-2059).\17\ The savings are measured over the 
entire lifetime of consumer water heaters purchased in the previous 30-
year period. DOE quantified the energy savings attributable to each TSL 
as the difference in energy consumption between each standards case and 
the no-new-standards case. The no-new-standards case represents a 
projection of energy consumption that reflects how the market for a 
product would likely evolve in the absence of amended energy 
conservation standards.
---------------------------------------------------------------------------

    \17\ Each TSL is composed of specific efficiency levels for each 
product class. The TSLs considered for this NOPR are described in 
section V.A of this document. DOE conducted a sensitivity analysis 
that considers impacts for products shipped in a 9-year period.
---------------------------------------------------------------------------

    DOE used its national impact analysis (``NIA'') spreadsheet model 
to estimate national energy savings (``NES'') from potential amended or 
new standards for consumer water heaters. The NIA spreadsheet model 
(described in section IV.H of this document) calculates energy savings 
in terms of site energy, which is the energy directly consumed by 
products at the locations where they are used. For electricity, DOE 
reports national energy savings in terms of primary energy savings, 
which is the savings in the energy that is used to generate and 
transmit the site electricity. For natural gas, the primary energy 
savings are considered to be equal to the site energy savings. DOE also 
calculates NES in terms of FFC energy savings. The FFC metric includes 
the energy consumed in extracting, processing, and transporting primary 
fuels (i.e., coal, natural gas, petroleum fuels), and thus presents a 
more complete picture of the impacts of energy conservation 
standards.\18\ DOE's approach is based on the calculation of an FFC 
multiplier for each of the energy types used by covered products or 
equipment. For more information on FFC energy savings, see section 
IV.H.1 of this document.
---------------------------------------------------------------------------

    \18\ The FFC metric is discussed in DOE's statement of policy 
and notice of policy amendment. 76 FR 51282 (Aug. 18, 2011), as 
amended at 77 FR 49701 (Aug. 17, 2012).
---------------------------------------------------------------------------

2. Significance of Savings
    To adopt any new or amended standards for a covered product, DOE 
must determine that such action would result in significant energy 
savings. (42 U.S.C. 6295(o)(3)(B))
    The significance of energy savings offered by a new or amended 
energy conservation standard cannot be determined without knowledge of 
the specific circumstances surrounding a given rulemaking.\19\ For 
example, some covered products and equipment have most of their energy 
consumption occur during periods of peak energy demand. The impacts of 
these products on the energy infrastructure can be more pronounced than 
products with relatively constant demand. Accordingly, DOE evaluates 
the significance of energy savings on a case-by-case basis, taking into 
account the significance of cumulative FFC national energy savings, the 
cumulative FFC emissions reductions, and the need to confront the 
global climate crisis, among other factors. DOE has initially 
determined the energy savings from the proposed standard levels are 
``significant'' within the meaning of 42 U.S.C. 6295(o)(3)(B).
---------------------------------------------------------------------------

    \19\ The numeric threshold for determining the significance of 
energy savings established in a final rule published on February 14, 
2020 (85 FR 8626, 8670), was subsequently eliminated in a final rule 
published on December 13, 2021 (86 FR 70892, 70906).
---------------------------------------------------------------------------

E. Economic Justification

1. Specific Criteria
    As noted previously, EPCA provides seven factors to be evaluated in 
determining whether a potential energy conservation standard is 
economically justified. (42 U.S.C. 6295(o)(2)(B)(i)(I)-(VII)) The 
following sections discuss how DOE has addressed each of those seven 
factors in this proposed rulemaking.
a. Economic Impact on Manufacturers and Consumers
    In determining the impacts of a potential amended standard on 
manufacturers, DOE conducts an MIA, as discussed in section IV.J of 
this document. DOE first uses an annual cash-flow approach to determine 
the quantitative impacts. This step includes both a short-term 
assessment--based on the cost and capital requirements during the 
period between when a regulation is issued and when entities must 
comply with the regulation--and a long-term assessment over a 30-year 
period. The industry-wide impacts analyzed include (1) INPV, which 
values the industry on the basis of expected future cash flows, (2) 
cash flows by year, (3) changes in revenue and income, and (4) other 
measures of impact, as appropriate. Second, DOE analyzes and reports 
the impacts on different types of manufacturers, including impacts on 
small manufacturers. Third, DOE considers the impact of standards on 
domestic manufacturer employment and manufacturing capacity, as well as 
the potential for standards to result in plant closures and loss of 
capital investment. Finally, DOE takes into account cumulative impacts 
of various DOE regulations and other regulatory requirements on 
manufacturers.
    For individual consumers, measures of economic impact include the 
changes in LCC and PBP associated with new or amended standards. These 
measures are discussed further in the following section. For consumers 
in the aggregate, DOE also calculates the national net present value of 
the consumer costs and benefits expected to result from particular 
standards. DOE also evaluates the impacts of potential standards on 
identifiable subgroups of consumers that may be affected 
disproportionately by a standard.
    An anonymous commenter indicated that the benefits of making water 
heaters more energy-efficient would likely outweigh the costs. The 
commenter stated that many households have either

[[Page 49073]]

very old water heaters or water heaters that consume a significant 
amount of energy, and that energy conservation standards can be helpful 
in guiding customer choices. (Anonymous, No. 19)
b. Savings in Operating Costs Compared to Increase in Price (LCC and 
PBP)
    EPCA requires DOE to consider 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 of, or in the 
initial charges for, or maintenance expenses of, the covered product 
that are likely to result from a standard. (42 U.S.C. 
6295(o)(2)(B)(i)(II)) DOE conducts this comparison in its LCC and PBP 
analysis.
    The LCC is the sum of the purchase price of a product (including 
its installation) and the operating expense (including energy, 
maintenance, and repair expenditures) discounted over the lifetime of 
the product. The LCC analysis requires a variety of inputs, such as 
product prices, product energy consumption, energy prices, maintenance 
and repair costs, product lifetime, and discount rates appropriate for 
consumers. To account for uncertainty and variability in specific 
inputs, such as product lifetime and discount rate, DOE uses a 
distribution of values, with probabilities attached to each value.
    The PBP is the estimated amount of time (in years) it takes 
consumers to recover the increased purchase cost (including 
installation) of a more-efficient product through lower operating 
costs. DOE calculates the PBP by dividing the change in purchase cost 
due to a more-stringent standard by the change in annual operating cost 
for the year that standards are assumed to take effect.
    For its LCC and PBP analysis, DOE assumes that consumers will 
purchase the covered products in the first year of compliance with new 
or amended standards. The LCC savings for the considered efficiency 
levels are calculated relative to the case that reflects projected 
market trends in the absence of new or amended standards. DOE's LCC and 
PBP analysis is discussed in further detail in section IV.F of this 
document.
c. Energy Savings
    Although significant conservation of energy is a separate statutory 
requirement for adopting an energy conservation standard, EPCA requires 
DOE, in determining the economic justification of a standard, to 
consider the total projected energy savings that are expected to result 
directly from the standard. (42 U.S.C. 6295(o)(2)(B)(i)(III)) As 
discussed in section III.D of this document, DOE uses the NIA 
spreadsheet models to project national energy savings.
d. Lessening of Utility or Performance of Products
    In establishing product classes and in evaluating design options 
and the impact of potential standard levels, DOE evaluates potential 
standards that would not lessen the utility or performance of the 
considered products. (42 U.S.C. 6295(o)(2)(B)(i)(IV)) Based on data 
available to DOE, the standards proposed in this document would not 
reduce the utility or performance of the products under consideration 
in this rulemaking.
e. Impact of Any Lessening of Competition
    EPCA directs DOE to consider the impact of any lessening of 
competition, as determined in writing by the Attorney General, that is 
likely to result from a proposed standard. (42 U.S.C. 
6295(o)(2)(B)(i)(V)) EPCA also directs the Attorney General to 
determine the impact, if any, of any lessening of competition likely to 
result from a proposed standard and to transmit such determination to 
the Secretary within 60 days of the publication of a proposed rule, 
together with an analysis of the nature and extent of the impact. (42 
U.S.C. 6295(o)(2)(B)(ii)) DOE will transmit a copy of this proposed 
rule to the Attorney General with a request that the Department of 
Justice (``DOJ'') provide its determination on this issue. DOE will 
publish and respond to the Attorney General's determination in the 
final rule. DOE invites comment from the public regarding the 
competitive impacts that are likely to result from this proposed rule. 
In addition, stakeholders may also provide comments separately to DOJ 
regarding these potential impacts. See the ADDRESSES section for 
information to send comments to DOJ.
f. Need for National Energy Conservation
    DOE also considers the need for national energy and water 
conservation in determining whether a new or amended standard is 
economically justified. (42 U.S.C. 6295(o)(2)(B)(i)(VI)) The energy 
savings from the proposed standards are likely to provide improvements 
to the security and reliability of the Nation's energy system. 
Reductions in the demand for electricity also may result in reduced 
costs for maintaining the reliability of the Nation's electricity 
system. DOE conducts a utility impact analysis to estimate how 
standards may affect the Nation's needed power generation capacity, as 
discussed in section IV.M of this document.
    DOE maintains that environmental and public health benefits 
associated with the more efficient use of energy are important to take 
into account when considering the need for national energy 
conservation. The proposed standards are likely to result in 
environmental benefits in the form of reduced emissions of air 
pollutants and greenhouse gases (``GHGs'') associated with energy 
production and use. DOE conducts an emissions analysis to estimate how 
potential standards may affect these emissions, as discussed in section 
IV.K of this document; the estimated emissions impacts are reported in 
section V.X of this document. DOE also estimates the economic value of 
emissions reductions resulting from the considered TSLs, as discussed 
in section IV.L of this document.
g. Other Factors
    In determining whether an energy conservation standard is 
economically justified, DOE may consider any other factors that the 
Secretary deems to be relevant. (42 U.S.C. 6295(o)(2)(B)(i)(VII)) To 
the extent DOE identifies any relevant information regarding economic 
justification that does not fit into the other categories described 
previously, DOE could consider such information under ``other 
factors.''
2. Rebuttable Presumption
    As set forth in 42 U.S.C. 6295(o)(2)(B)(iii), EPCA creates a 
rebuttable presumption that an energy conservation standard is 
economically justified if the additional cost to the consumer of a 
product that meets the standard is less than three times the value of 
the first year's energy savings resulting from the standard, as 
calculated under the applicable DOE test procedure. DOE's LCC and PBP 
analyses generate values used to calculate the effects that proposed 
energy conservation standards would have on the payback period for 
consumers. These analyses include, but are not limited to, the 3-year 
payback period contemplated under the rebuttable-presumption test. In 
addition, DOE routinely conducts an economic analysis that considers 
the full range of impacts to consumers, manufacturers, the Nation, and 
the environment, as required under 42 U.S.C. 6295(o)(2)(B)(i). The 
results of this analysis serve as the basis for DOE's evaluation of the 
economic justification

[[Page 49074]]

for a potential standard level (thereby supporting or rebutting the 
results of any preliminary determination of economic justification). 
The rebuttable presumption payback calculation is discussed in section 
IV.X of this proposed rule.

F. Interested Party Recommendations

    As discussed in section II.B.2 of this document, DOE received a 
Joint Stakeholder Recommendation for amended standards pertaining to 
electric storage water heaters, gas-fired storage water heaters, and 
gas-fired instantaneous water heaters. Specifically, the Joint 
Stakeholder Recommendation recommended that DOE adopt the standards 
shown in Table III.1 through Table III.3. (Joint Stakeholders, No. 49 
at pp. 9-10)

             Table III.1--Joint Stakeholder Recommendation Levels for Electric Storage Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                                 DOE rated storage volume
                           First hour    -----------------------------------------------------------------------
      Draw pattern        rating (FHR)      >=20 to <=30       >30 to <=35       >35 to <=55       >55 to 120
                                               gallons           gallons           gallons           gallons
----------------------------------------------------------------------------------------------------------------
Low...................  >=18 to <51       Current Standard  Height <=36       2.3 UEF.........  2.5 UEF
                         gallons.          *.                inches: Current
                                                             Standard *.
                                                           ------------------
                                                            Height >36
                                                             inches: 2.0 UEF.
-----------------------------------------------------------------------------
Medium................  >=51 to <75       2.0 UEF.........  2.0 UEF.........
                         gallons.
-----------------------------------------
High..................  >=75 gallons....
----------------------------------------------------------------------------------------------------------------
* Current Standard: UEF = 0.9254-0.0003 x Vr, where Vr is the DOE rated storage volume.


   Table III.2--Joint Recommendation Recommended Levels for Gas-Fired
                          Storage Water Heaters
------------------------------------------------------------------------
                         First hour rating    DOE rated storage volume
      Draw pattern             (FHR)            >=20 to <=55 gallons
------------------------------------------------------------------------
Low....................  >=18 to <51           UEF = 0.6451-0.0019 * Vr
                          gallons.
Medium.................  >=51 to <75           UEF = 0.7046-0.0017 * Vr
                          gallons.
High...................  >=75 gallons.....     UEF = 0.7424-0.0013 * Vr
------------------------------------------------------------------------
Note: Vr = DOE rated storage volume. These recommended levels are for
  gas-fired storage water heaters including standard, low NOX, and ultra-
  low NOX burners. The levels shown are equivalent to DOE's preliminary
  TSD Efficiency Level 2 (EL2).


   Table III.3--Joint Recommendation Recommended Levels for Gas-Fired
                       Instantaneous Water Heaters
------------------------------------------------------------------------
             Draw pattern                 Recommended efficiency level
------------------------------------------------------------------------
Medium...............................                          0.91 UEF
High.................................                          0.93 UEF
------------------------------------------------------------------------
Note: These recommended levels are for gas-fired instantaneous water
  heaters with a DOE rated storage volume of <2 gallons and an input
  rating of >50,000 BTU per hour. The levels shown are equivalent to
  DOE's preliminary TSD Efficiency Level 2 (EL2).

    In support of the recommended levels, the Joint Stakeholders stated 
that, if adopted, the recommendation would transition the majority of 
electric water heaters to heat pump technology and make incremental 
steps to improve gas-fired water heater efficiency. The Joint 
Stakeholders also stated that the recommended levels would provide 
significant reductions in national water heating energy use and their 
associated greenhouse gas emissions, save consumers money on their 
utility bills, provide manufacturers more business certainty with room 
to innovate, and offer manufacturers, consumers, and professional 
installers flexibility for certain applications where heat pump 
technology is not currently a viable replacement option. (Joint 
Stakeholders, No. 49 at p. 1 and pp. 5-6)
    DOE has included an analysis of the benefits and burdens of the 
Joint Stakeholder Recommendation as part of its analyses of amended 
energy conservation standards for this NOPR. The Joint Stakeholder 
Recommendation is discussed in further detail, as applicable, 
throughout section IV of this document. Following the submission by the 
Joint Stakeholders, three other commenters, SWEEP, CEE and NYSERDA, 
submitted comments in support of the efficiency level proposals 
recommended by the Joint Stakeholders. (SWEEP, No. 53 at p. 1; CEE, No. 
50 at p. 1; NYSERDA, No. 51 at pp. 1-2)
    The CA IOUs provided a recommendation similar to the Joint 
Stakeholder Recommendation, suggesting that all electric storage water 
heaters between 20 and 120 gallons in rated storage volume would have 
to meet heat pump standards roughly equivalent to Efficiency Level 
(``EL'') 2 analyzed in the March 2022 Preliminary Analysis, except for 
products 20-30 gallons in the low draw pattern (based on FHR). The CA 
IOUs justified their recommendation by stating that it sought to 
maximize the share of the future residential water heater market that 
will be high-efficiency, while allowing less-efficient products to fill 
applications that are challenging for currently available heat pump 
water heaters. (CA IOUs, No. 52 at p. 6-7) The CA IOUs' recommendation 
is shown in Table III.4.

[[Page 49075]]



                   Table III.4--CA IOUs Recommended Levels for Electric Storage Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                                         Rated storage volume
          Draw pattern             First hour rating -----------------------------------------------------------
                                         (FHR)            >=20 to <=30 gallons          >30 to <=120 gallons
----------------------------------------------------------------------------------------------------------------
Low.............................  >=18 to <51                            0.93 UEF                      3.30 UEF
                                   gallons.
----------------------------------------------------------------------------------------------------------------
Medium..........................  >=51 to <75                                  3.35 UEF
                                   gallons.
----------------------------------------------------------------------------------------------------------------
High............................  >=75 gallons......                           3.47 UEF
----------------------------------------------------------------------------------------------------------------

    The Gas Association Commenters submitted a request for DOE to 
follow the normal notice and comment procedure for proposing standards 
prior to a final rule, rather than promulgating a direct final rule in 
response to the Joint Stakeholder Recommendation and the CA IOUs 
recommendation. The Gas Association Commenters suggested that DOE 
publish an advance notice of proposed rulemaking (``ANOPR'') prior to a 
NOPR in order to solicit feedback. The Gas Association Commenters also 
argued that DOE does not have the grounds for utilizing the direct 
final rule process based on the provisions in EPCA and relevant 
precedent. (Gas Association Commenters, No. 54 at pp. 2-3)
    To this, DOE notes that it is proposing standards for consumer 
water heaters and seeking public comment. As for issuing an ANOPR to 
solicit feedback, DOE has already solicited public comment through the 
May 2020 RFI and the March 2022 Preliminary Analysis. Further, the 
March 2022 Preliminary Analysis details the analytical methods and 
preliminary results DOE has used in this NOPR. As such, DOE does not 
believe an ANOPR is necessary or appropriate.
    NYSERDA agreed with DOE's analysis that supports heat pump water 
heater (``HPWH'') technology. NYSERDA noted that the HPWH market has 
seen significant improvement in cost and efficiency in the last decade, 
and they are pleased to see this reflected through DOE's analysis as 
part of this rulemaking. (NYSERDA, No. 35 at p.2) NYSERDA also 
recommended that all products use condensing and heat pump technology 
as justified and appropriate based on DOE's final analysis. (NYSERDA, 
No. 35 at p. 6) In response, DOE notes that most energy conservation 
standard levels proposed for electric storage water heaters in this 
NOPR effectively require the use of heat pump technology. However, DOE 
cannot and does not establish standards to explicitly require certain 
technologies. All standards proposed by DOE must be both 
technologically feasible and economically justified, and the standards 
proposed in this NOPR are consistent with that requirement.
    Rheem urged DOE to propose and then finalize an EL for gas-fired 
storage water heaters that requires electricity and is achievable with 
a Category I venting solution to moderate the installation costs 
associated with this rulemaking, as well as the next, in anticipation 
of future electrification efforts. Rheem argued that doing so would 
ensure that 120 V electrical power already exists at the water heater 
for the next replacement and provide consumers with the option of 
choosing a drop-in 120 V heat pump water heater replacement or high 
efficiency condensing water heater. (Rheem, No. 45 at p. 4) In 
addition, Rheem stated that it did not recommend amending the standard 
for gas-fired instantaneous water heaters to EL 3. (Rheem, No. 45 at p. 
7) Rinnai recommended that gas-fired storage water heater standards be 
set at 0.80 UEF \20\ because this efficiency level appears to be 
feasible and could result in significant energy savings because gas-
fired storage water heaters may comprise 42 percent of the overall 
market. Rinnai stated that EL 2 would continue to allow lower 
efficiency products to be used in the market. (Rinnai, No. 55 at p. 1)
---------------------------------------------------------------------------

    \20\ In the March 2022 Preliminary Analysis, 0.80 was the UEF 
value for EL 4 for a representative 48-gallon gas-fired storage 
water heater in the high draw pattern.
---------------------------------------------------------------------------

    After weighing the benefits and burdens of various potential 
standard levels, DOE is proposing to amend the standards to those in 
trial standard level 2, which consists of efficiency level 2 for both 
gas-fired storage water heaters and gas-fired instantaneous water 
heaters. Additional discussion of DOE's rationale is discussed in 
section V.C of this document.
    One Gas and the Gas Association Commenters strongly endorse use of 
non-regulatory alternatives as a means for addressing energy efficiency 
and greenhouse gas emissions from gas-fired consumer appliances such as 
the current review of ENERGY STAR for consumer water heaters. One Gas 
also recognizes that the non-regulatory alternatives available to the 
Department provide it with the most efficient and effective means of 
addressing most market failure causes, such as purchase decisions not 
being made available to consumers inhabiting a dwelling. (ONE Gas, No. 
44 at p. 8; Gas Association Commenters, No. 41, attachment 6, at p. 11) 
A full discussion of the non-regulatory alternatives considered by DOE 
is presented in chapter 17 of the TSD for this proposed rule. DOE is 
required to establish amended energy conservation standards for 
consumer water heaters if an amended standard would result in 
significant conservation of energy and would be both technologically 
feasible and economically justified.
    BWC strongly discourages DOE from considering regional standards or 
specifications as part of their analysis. While these are employed in 
certain parts of the U.S., they encompass non-energy efficiency related 
elements but do not account for all product types or approach things 
from a national perspective. (BWC, No.32 at p.6) DOE is not proposing 
any regional standards in this NOPR.

IV. Methodology and Discussion of Related Comments

    This section addresses the analyses DOE has performed for this 
rulemaking with regard to consumer water heaters. Separate paragraphs 
address each component of DOE's analyses.
    DOE used several analytical tools to estimate the impact of the 
standards proposed in this document. The first tool is a spreadsheet 
that calculates the LCC savings and PBP of potential amended or new 
energy conservation standards. The national impacts analysis uses a 
second spreadsheet set that provides shipments projections and 
calculates national energy savings and net present value of total 
consumer costs and savings expected to result from potential energy 
conservation standards. DOE uses the third spreadsheet tool, the 
Government Regulatory Impact Model (``GRIM''), to assess manufacturer 
impacts of potential standards. These three spreadsheet tools

[[Page 49076]]

are available on the DOE website for this proposed rulemaking: 
www1.eere.energy.gov/buildings/appliance_standards/standards.aspx?productid=32. Additionally, DOE used output from the 
latest version of the Energy Information Administration's (``EIA's'') 
Annual Energy Outlook (``AEO''), a widely known energy projection for 
the United States, for the emissions and utility impact analyses.

A. Market and Technology Assessment

    DOE develops information in the market and technology assessment 
that provides an overall picture of the market for the products 
concerned, including the purpose of the products, the industry 
structure, manufacturers, market characteristics, and technologies used 
in the products. This activity includes both quantitative and 
qualitative assessments, based primarily on publicly-available 
information. The subjects addressed in the market and technology 
assessment for this rulemaking include (1) a determination of the scope 
of the rulemaking and product classes, (2) manufacturers and industry 
structure, (3) existing efficiency programs, (4) shipments information, 
(5) market and industry trends; and (6) technologies or design options 
that could improve the energy efficiency of consumer water heaters. The 
key findings of DOE's market assessment are summarized in the following 
sections. See chapter 3 of the NOPR TSD for further discussion of the 
market and technology assessment.
    In the preliminary analysis, DOE sought comment on whether the 
manufacturer model counts from publicly available databases accurately 
reflect manufacturer market shares on a model- or sales-weighted basis. 
In response, AHRI and Rheem indicated that manufacturer model counts in 
publicly available databases do not accurately reflect manufacturer 
market shares. (AHRI, No. 31 at p. 16; Rheem, No. 45 at pp. 3-4) AHRI 
commented that the model count in a certification directory does not 
reflect sales volume and will provide an inaccurate view of the market. 
AHRI added that a manufacturer with a large number of models does not 
necessarily have a larger market share compared to a manufacturer with 
a smaller number of models. (AHRI, No. 42 at p. 2) DOE agrees with 
these comments and therefore did not consider database model counts 
alone to be representative of manufacturer market share in this NOPR's 
analyses. DOE considered market research \21\ as well as market share 
feedback from confidential interviews with manufacturers to determine 
more accurate values. Additional details can be found in chapter 3 of 
the TSD.
---------------------------------------------------------------------------

    \21\ Market shares data were found from Statista report 
Residential water heater market share by vendor in the United States 
from 2018 to 2021, available online at: www.statista.com/statistics/700257/us-residential-water-heater-market-share/ (Last accessed May 
1, 2023).
---------------------------------------------------------------------------

    During a public meeting held on April 12, 2022, related to this 
rulemaking, NEEA noted that UEF ratings have increased over the last 
decade in products ranging from 40 to 80 gallons. (NEEA, No. 31, p. 7-
8) DOE agrees that UEF ratings have generally increased over the last 
decade, and the latest efficiency distribution data were used to inform 
this NOPR analysis.
1. Product Classes
    When evaluating and establishing energy conservation standards, DOE 
shall establish separate standards for a group of covered products 
(i.e., establish a separate product class) if DOE determines that 
separate standards are justified based on the type of energy used, or 
if DOE determines that the group of covered products has a capacity or 
other performance-related feature that other products do not have and 
such feature justifies a different standard. (42 U.S.C. 6295(q)) In 
making a determination whether a performance-related feature justifies 
a different standard, DOE must consider such factors as the utility of 
the feature to the consumer and other factors DOE determines are 
appropriate. (Id.)
    EPCA, as amended by the National Appliance Energy Act (NAECA; Pub. 
L. 100-12), established initial energy conservation standards, 
expressed as EF, that were based on three product classes 
differentiated by fuel type: (1) gas-fired, (2) oil-fired, and (3) 
electric. (42 U.S.C. 6295(e)(1)) These standards applied to consumer 
water heaters manufactured on or after January 1, 1990.
    DOE subsequently amended these EF standards twice, most recently in 
the April 2010 Final Rule. 75 FR 20112. In the April 2010 Final Rule, 
DOE further divided consumer water heaters into product classes based 
on fuel type (gas-fired, oil-fired, or electric), product type 
(storage, instantaneous, tabletop), storage volume, and input rate.
    The Energy Efficiency Improvement Act of 2015 (``EEIA 2015'') (Pub. 
L. 114-11), enacted on April 30, 2015, added a definition of ``grid-
enabled water heater'' and a standard in terms of EF for such products 
to EPCA's energy conservation standards. (42 U.S.C. 6295(e)(6)(A)(ii)) 
DOE codified the definition for grid-enabled water heater and the 
associated energy conservation standards in a final rule published on 
August 11, 2015. 80 FR 48004.
    Most recently, the December 2016 Conversion Factor Final Rule 
translated the EF-based standards to UEF-based standards for certain 
classes of consumer water heaters, which are shown in Table IV.1. 
Although the classes of consumer water heaters with UEF-based standards 
have limitations on the stored volume and (if applicable) fuel input 
rate, as discussed in that final rule, the standards established in 
EPCA do not place any limitation on the storage volume of consumer 
water heaters and do not define a minimum fuel input rate for gas-fired 
instantaneous water heaters. Therefore, the original standards 
established by EPCA in terms of EF remain applicable to all products 
without UEF-based standards. 81 FR 96204, 96209-96211.
    The 36 product classes for which DOE has currently established UEF-
based standards are summarized in Table IV.1. The product classes 
without UEF-based standards, for which EF-based standards from EPCA 
apply, are shown in Table IV.2.

Table IV.1--Consumer Water Heater Product Classes With Current UEF-Based
                                Standards
------------------------------------------------------------------------
                                     Rated storage
                                   volume and input
          Product type                rating (if         Draw patterns
                                      applicable)
------------------------------------------------------------------------
Gas-Fired Storage Water Heater..  >=20 gal and <=55   Very Small, Low,
                                   gal.                Medium, High.
Gas-Fired Storage Water Heater..  >55 gal and <=100   Very Small, Low,
                                   gal.                Medium, High.
Oil-Fired Storage Water Heater..  <=50 gal..........  Very Small, Low,
                                                       Medium, High.
Electric Storage Water Heater...  >=20 gal and <=55   Very Small Low,
                                   gal.                Medium, High.
Electric Storage Water Heater...  >55 gal and <=120   Very Small, Low,
                                   gal.                Medium, High.

[[Page 49077]]

 
Tabletop Water Heater...........  >=20 gal and <=120  Very Small, Low,
                                   gal.                Medium, High.
Instantaneous Gas-Fired Water     <2 gal and >50,000  Very Small, Low,
 Heater.                           Btu/h.              Medium, High.
Instantaneous Electric Water      <2 gal............  Very Small, Low,
 Heater.                                               Medium, High.
Grid-Enabled Water Heater.......  >75 gal...........  Very Small, Low,
                                                       Medium, High.
------------------------------------------------------------------------


 Table IV.2--Consumer Water Heater Product Classes Without Current UEF-
                             Based Standards
------------------------------------------------------------------------
                                          Rated storage volume and input
             Product class                    rating (if applicable)
------------------------------------------------------------------------
Gas-fired Storage......................  <20 gal.
                                         >100 gal.
Oil-fired Storage......................  >50 gal.
Electric Storage.......................  <20 gal.
                                         >120 gal
Tabletop...............................  <20 gal.
                                         >120 gal.
Gas-fired Instantaneous................  <2 gal and <=50,000 Btu/h.
                                         >=2 gal.
Oil-fired Instantaneous................  <2 gal.
                                         >=2 gal.
Electric Instantaneous.................  >=2 gal.
------------------------------------------------------------------------

    In the March 2022 Preliminary Analysis, DOE used the conversion 
factor calculations applied in the December 2016 Conversion Factor 
Final Rule to translate EPCA's EF-based standards to equivalent UEF-
based standards for the product classes in Table IV.2. The methodology 
and assumptions used for this conversion are described in detail in the 
preliminary TSD and in the NOPR TSD (see chapter 5). DOE is proposing 
to adopt UEF-based standards for these classes, which is further 
discussed in section IV.C.2 of this document.
a. Circulating Water Heater and Low-Temperature Water Heaters
    As discussed in section III.B of this document, in the June 2023 TP 
Final Rule, DOE established definitions for ``circulating water 
heater'' and ``low temperature water heater'' in 10 CFR 430.2, and also 
established test procedures to determine the UEF of these types of 
water heaters. 88 FR 40406. DOE has identified three potential classes 
of circulating water heater based on fuel type, which are shown in 
Table IV.3. The input ratings associated with each product class are 
derived from the instantaneous water heater definitions in EPCA for 
each fuel type. (42 U.S.C. 6291(27))

        Table IV.3--Proposed Classes of Circulating Water Heaters
------------------------------------------------------------------------
        Product class                       Characteristics
------------------------------------------------------------------------
Gas-fired Circulating Water    A circulating water heater with a nominal
 Heater.                        input of 200,000 Btu/h or less; contains
                                no more than one gallon of water per
                                4,000 Btu/h of input.
Oil-fired Circulating Water    A circulating water heater with a nominal
 Heater.                        input of 210,000 Btu/h or less; contains
                                no more than one gallon of water per
                                4,000 Btu/h of input.
Electric Circulating Water     A circulating water heater with an input
 Heater.                        of 12 kW or less; contains no more than
                                one gallon of water per 4,000 Btu/h of
                                input (including heat pump-only units
                                with power inputs of no more than 24 A
                                at 250 V).
------------------------------------------------------------------------

    DOE is proposing to add these terms (``gas-fired circulating water 
heater,'' ``oil-fired circulating water heater,'' and ``electric 
circulating water heater'') to the definitions found at 10 CFR 430.2.
    As discussed in the June 2023 TP Final Rule, DOE has determined 
that circulating water heaters with input ratings below 200,000 Btu/h 
(for gas-fired), 210,000 Btu/h (for oil-fired), or 12 kW (for electric) 
meet the definitional criteria for instantaneous consumer water 
heaters. As such, these products are subject to the applicable energy 
conservation standards; however, DOE previously provided an enforcement 
policy for circulating water heaters.\22\ Because an amended test 
procedure that includes new provisions for testing circulating water 
heaters was recently finalized in the June 2023 TP Final Rule, DOE is 
proposing to establish updated UEF standards that reflect the new test 
method as discussed further in section IV.C.2 of this document. DOE did 
not consider amended standards for such products as part of this NOPR 
analysis in order to allow manufacturers time to test their products 
according to the updated test method and to develop sufficient data 
upon which to base future rulemaking analysis. As discussed in section 
V of this document,

[[Page 49078]]

DOE proposes to update the standards for other types of gas-fired 
instantaneous water heaters. Therefore, DOE also proposes to establish 
separate classes for circulating water heaters in order to maintain the 
standards at their current stringency.
---------------------------------------------------------------------------

    \22\ Prior to the June 2023 TP Final Rule, DOE became aware of 
gas-fired instantaneous water heaters meeting the definition of 
consumer water heaters which operated differently than those DOE had 
previously considered in test procedure rulemakings. On September 5, 
2019, DOE issued an enforcement policy for consumer water heaters 
meeting the definition of gas-fired ``circulating water heater'' as 
described in said enforcement policy in which DOE stated that it 
would not seek civil penalties for failing to certify these 
products, or if these products failed to comply with applicable 
standards, on or before December 31, 2021. The June 2023 TP Final 
Rule has since addressed this issue by establishing test procedures 
to determine UEF ratings for circulating water heaters.
---------------------------------------------------------------------------

    AHRI expressed concern regarding DOE's coverage of gas-fired 
circulating water heaters as consumer products, stating that most are 
used in commercial applications. AHRI requested that DOE reinstate the 
enforcement policy on circulating water heaters, which was issued on 
September 5, 2019, and expired on December 31, 2021. (AHRI, No. 42 at 
pp. 5-6)
    As discussed, DOE has previously determined that these products are 
appropriately classified under EPCA as consumer water heaters. In 
addition, as discussed in the June 2023 TP Final Rule, DOE has 
identified circulating water heaters compatible with residential 
applications, and the establishment of a test method to determine the 
UEF of these products removes the need for any further enforcement 
policy. 88 FR 40406.
    DOE requests comment on its proposed deferral of consideration of 
amended, more-stringent standards for circulating water heaters.
    Regarding low temperature water heaters, DOE notes that they are 
covered as electric instantaneous water heaters. As discussed in 
section III.A of this document, DOE is not considering updated 
standards for electric instantaneous water heaters for this NOPR. 
Therefore, although low temperature water heaters are tested in a 
slightly different manner as other electric instantaneous water 
heaters, DOE is proposing to maintain low temperature water heaters 
within the broader electric instantaneous water heater product class 
and is not proposing a separate class for them at this time.
b. Storage-Type and Instantaneous-Type Product Classes
    In the March 2022 Preliminary Analysis, DOE addressed comments 
received in response to the May 2020 RFI that suggested that DOE should 
consider eliminating the separate product classes for instantaneous 
water heaters. For the preliminary analysis, DOE analyzed separate 
classes for instantaneous water heaters, but sought feedback from 
stakeholders on whether storage-type and instantaneous-type water 
heaters product classes should be combined. (See section 2.3 of the 
preliminary TSD.)
    In response, AHRI, BWC, and Rheem urged DOE not to combine storage 
and instantaneous product classes, commenting that this would be 
inconsistent with EPCA. (AHRI, No. 31 at p. 15; AHRI, No. 42 at p. 2; 
BWC, No. 32 at p. 1; Rheem, No. 45 at p. 2) AHRI stated that storage 
and instantaneous water heaters each provide unique utility to 
consumers due to their smaller footprint, and storage water heaters 
provide unique utility in that they allow consumers to participate in 
demand-response programs. AHRI asserted that combining the two product 
classes could decrease consumer utility if standards were set such that 
either storage or instantaneous water heaters were precluded from the 
market. (AHRI, No. 42 at p. 2) BWC requested that DOE not merge the 
storage and instantaneous product classes of gas-fired water heaters 
because they have different installation requirements and are useful in 
different situations. (BWC, No. 32 at p. 1) BWC stated that 
instantaneous water heaters are typically wall-hung, reducing the 
required floor space, and models are available for installation 
outdoors. BWC stated that storage water heaters, unlike instantaneous 
water heaters, maintain a volume of water available use immediately 
once a draw commences (whereas instantaneous water heaters take 
additional time to heat the water). BWC asserted that storage water 
heaters also provide hot water utility for applications which require 
large ``dump loads'' such as large tubs or multiple, concurrent, hot 
water draws by baths, showers, laundry, and/or dishes. Lastly, BWC also 
noted that storage water heaters can be utilized in demand response 
programs to store hot water for use when utility rates are high. (Id.)
    Rheem suggested that combining storage and instantaneous product 
classes will lead to UEF standards that are not technologically 
feasible for some volume and input ranges because the standard cannot 
be lowered. Rheem also stated that combining storage and instantaneous 
water heaters into the same products class could result in one type of 
water heater being regulated out of existence or prevent DOE from 
amending standards to the maximum technologically feasible and 
economically justified level. (Rheem, No. 45 at p. 2) Rheem stated that 
the ability to store heated water is a performance-related feature that 
justifies a separate analysis for storage and instantaneous due to 
differences in operation, installation, and application. Rheem cited 
electric instantaneous as an example of a product ideal for hand-
washing and low continuous flow point-of-use applications, while 
electric storage water heaters are better suited for higher flow rates 
with shorter draws such as to fill a bathtub or supply a shower. Rheem 
also noted that electric instantaneous water heaters require 
significant electrical panel capacity to serve an entire home, whereas 
electric storage water heaters use a much lower panel capacity. 
Finally, Rheem noted that the ability of storage water heaters to 
operate in thermal storage programs further differentiates their 
utility from instantaneous water heaters. (Id.)
    DOE has tentatively determined that the existing separate product 
classes for storage and instantaneous water heaters--both electric and 
gas-fired--should be maintained. Storage and instantaneous water 
heaters offer distinct utilities to a consumer. For example, 
instantaneous water heaters provide a continuous supply of hot water, 
up to the maximum flow rate, while storage water heaters are often 
better suited to handle large initial demands for hot water as opposed 
to continuous draws. The ability of an instantaneous water heater to 
supply hot water continuously is directly attributed to its input rate 
and storage volume (i.e., the input rate to storage volume ratio). 
Statutorily, consumer storage water heaters are limited to ratios of no 
more than 4,000 Btu/h per gallon and consumer instantaneous water 
heaters are greater than 4,000 Btu/h per gallon. 42 U.S.C. 6291(27)(B). 
Therefore, instantaneous water heaters possess an inherently distinct 
capacity to provide a continuous supply of hot water to the consumer. 
Additionally, storage water heaters have associated standby energy 
losses that instantaneous water heaters do not. Due to these 
differences in consumer utility and operational characteristics, DOE 
has tentatively determined that different product classes and standards 
for storage and instantaneous water heaters are necessary.
c. Gas-Fired Water Heaters
    In response to the March 2022 Preliminary Analysis, several 
interested parties provided recommendations for the product classes for 
gas-fired water heaters.
    Atmos urged DOE to consider the impact that not distinguishing 
between condensing and non-condensing water heaters will have on 
whether Category I venting \23\ water heaters remain on the

[[Page 49079]]

market. (Atmos, No. 38 at p. 5) The Gas Association Commenters urged 
DOE to reconsider the conclusions reached in the December 2021 Venting 
Interpretive Final Rule,\24\ specifically with regard to gas-fired 
instantaneous water heaters, for which a condensing-level standard may 
be economically justifiable. The Gas Association Commenters Indicated 
that a condensing-level standard would lead to product unavailability 
for atmospherically vented gas-fired water heaters. (Gas Association 
Commenters, No. 41 at pp. 3-4)
---------------------------------------------------------------------------

    \23\ A Category I vented appliance is defined by the National 
Fire Protection Association (NFPA) and the American National 
Standards Institute (ANSI) in chapter 3 of NFPA 54-2021/ANSI Z223.1, 
the National Fuel Gas Code, as ``an appliance that operates with a 
nonpositive vent static pressure and with a vent gas temperature 
that avoids excessive condensate production in the vent.''
    \24\ On December 29, 2021, DOE published a final interpretive 
rule (``December 2021 Venting Interpretive Final Rule'') reinstating 
its long-standing interpretation that the heat exchanger technology 
and associated venting used to supply heated air or hot water is not 
a performance-related ``feature'' that provides a distinct consumer 
utility under EPCA. 86 FR 73947.
---------------------------------------------------------------------------

    ONE Gas recommended DOE maintain its breakout of the gas-fired 
storage water heater analysis in the preliminary TSD by Category I, 
III, and IV \25\ products and consider subdividing analysis of Category 
I into subcategories that require electric power (such as for induced 
draft and power damper models) and those that do not, as this split in 
the analysis would support compliance with 42 U.S.C. 6295(q)(1). ONE 
Gas also requested that DOE clarify why gas-fired products which 
require electricity to operate are not considered to ``consume a 
different kind of energy.'' (ONE Gas, No. 44 at p. 8) The Gas 
Association Commenters urged DOE to consider separate product classes 
for gas-fired water heaters that do not require an external electrical 
power supply, which they claimed could be eliminated by amended energy 
conservation standards achievable only by condensing products. The Gas 
Association Commenters added that all products which do not require 
electricity have a standing pilot and are noncondensing, and hence 
would become unavailable. These commenters also indicated that such 
products have a unique utility to be able to operate during outages or 
entirely off the grid. (Gas Association Commenters, No. 41 at p. 4)
---------------------------------------------------------------------------

    \25\ The National Fuel Gas Code, NFPA 54-2021/ANSI Z223.1, 
defines a category III vented appliance as ``an appliance that 
operates with a positive vent static pressure and with a vent gas 
temperature that avoids excessive condensate production in the 
vent.'' It defines a category IV vented appliance as ``an appliance 
that operates with a positive vent static pressure and with a vent 
gas temperature that can cause excessive condensate production in 
the vent.''
---------------------------------------------------------------------------

    As discussed at the beginning of this section, DOE shall establish 
separate product classes for a covered product based on: (1) fuel 
source; and (2) whether a type of product offers a unique capacity or 
other performance-related feature that justifies a different standard. 
(See 42 U.S.C. 6295(q)(1))
    In response to commenters' suggestions that DOE further consider 
whether to distinguish between non-condensing and condensing water 
heaters (or associated venting) for the purposes of establishing a 
separate product class, DOE reiterates its position stated in the March 
2022 preliminary analysis that, consistent with the December 2021 
Venting Interpretive Final Rule, non-condensing technology does not 
constitute a performance-related ``feature'' that provides a distinct 
utility to consumers as prescribed by EPCA at 42 U.S.C. 6295(q)(1). 
(See chapter 2 of the preliminary analysis TSD; 86 FR 73947.) In short, 
the type of technology (non-condensing or condensing) or venting used 
by the appliance, does not provide any utility to the consumer that is 
accessible to the layperson, which is based upon the consumer's 
operation of or interaction with the appliance. Therefore, there is no 
difference in the utility derived from the appliance based on these 
factors. 86 FR 73947, 73951, 73953. As explained in the Venting 
Interpretive Final Rule, DOE considers any additional costs associated 
with venting as part of its determination that an energy conservation 
standard is economically justified. Id. at 86 FR 73960. Because neither 
non-condensing operation, nor atmospheric, category I venting (which is 
associated with non-condensing operation) meet the requirements to be 
considered a performance-related ``feature'' as outlined at 42 U.S.C. 
6295(q)(1), DOE is not proposing separate product classes specifically 
to preserve this capability in gas-fired water heaters. DOE similarly 
finds that other venting categories (e.g., category IV venting) are 
also not a performance-related feature under EPCA.
    Regarding the recommendations that DOE separate product classes 
based on whether or not a gas-fired water heater uses auxiliary 
electricity, DOE has long held that use of auxiliary electric power in 
gas-fired products does not constitute ``consuming a different kind of 
energy'' from those that do not use auxiliary electric power under 
EPCA. EPCA defines ``energy'' as meaning electricity, or fossil 
fuels.\26\ (42 U.S.C. 6291(3)) EPCA initially separated water heaters 
by fuel type into only gas-fired, oil-fired, and electric water heaters 
product classes. (42 U.S.C. 6295(e)(1)) Although commenters have 
suggested that products that use both gas and electricity could be 
thought of as being gas-fired water heaters and electric water heaters, 
the usage of electricity in gas-fired water heaters is only a means to 
power auxiliary components and not to heat the water. Therefore, DOE 
has historically considered these products to be only gas-fired water 
heaters.
---------------------------------------------------------------------------

    \26\ The definition of ``energy'' also provides that the 
Secretary may, by rule, include other fuels within the meaning of 
the term ``energy'' if he determines that such inclusion is 
necessary or appropriate to carry out the purposes of this chapter. 
(42 U.S.C. 6291(3))
---------------------------------------------------------------------------

    As for whether use of auxiliary electricity constitutes a unique 
performance-related feature, DOE notes that, in an April 8, 2009 final 
rule, DOE declined to define separate product classes for gas cooking 
products that do not require electricity because DOE was unable to 
identify any unique utility associated with gas cooking products 
equipped with standing pilot ignition, compared to those with 
electronic ignition. While DOE considered that the ability to operate 
in the case of an atypical event such as the loss of line power was of 
benefit to consumers, DOE determined that battery-powered electronic 
ignition systems could provide ignition in the absence of line power 
and noted that such ignition systems already had been implemented in 
other products including portable gas-fired instantaneous water 
heaters. As such, consumer water heaters with standing pilot lights are 
not unique in the ability to operate during outages or entirely off the 
grid. Thus, DOE has tentatively determined that a separate product 
class for consumer water heaters with standing pilot lights is not 
warranted under 42 U.S.C. 6295(q)(1).
d. Electric Storage Water Heaters
    In the March 2022 Preliminary Analysis, DOE tentatively determined 
not to separate heat pump electric storage water heaters from the 
electric storage water heater product class. DOE noted that to the 
extent that heat pump electric storage water heaters use electricity to 
heat, they meet EPCA's definition of an electric storage-type water 
heater (see 42 U.S.C. 6291(27)(A)) and are subject to the current 
standards for electric storage water heaters at 10 CFR 430.32(d). (See 
chapter 2 of the preliminary TSD.) This position is also consistent 
with the April 2010 Final Rule. In that rule, DOE found that heat pump 
water electric storage water heaters did not meet the requirements for 
establishing a separate product class. 75 FR 20112, 20135. As stated 
previously, DOE establishes separate product classes based on two 
criteria: (1) fuel source; and (2) whether a type

[[Page 49080]]

of product offers a unique capacity or other performance-related 
feature that justifies a different standard. (See 42 U.S.C. 6295(q)(1)) 
In the April 2010 Final Rule, DOE noted that both heat pump electric 
storage water heaters and electric resistance storage water heaters use 
electricity as the fuel source. 75 FR 20112, 20135. As for capacity, 
DOE observed that heat pump electric storage water heaters were being 
offered as direct replacements for electric resistance storage water 
heaters. Id. DOE also noted that rated storage volumes and first hour 
ratings of heat pump electric storage water heaters were comparable to 
electric resistance storage water heaters. Id. Finally, DOE did not 
identify any other performance-related features that were unique to 
either heat pump electric storage water heaters or electric resistance 
storage water heaters. Id.
    EEI disagreed with DOE's decision in the preliminary analysis not 
to create a separate product class for heat pump electric storage water 
heaters and expressed concern over expanding heat pump-level standards 
to more electric storage water heaters than they currently apply to. 
(EEI, No. 31 at p. 35)
    Cirker also commented that DOE should consider separating out 
product classes for electric resistance storage water heaters from heat 
pump electric storage water heaters on the basis of personal experience 
with three heat pump water heaters installed within the commenter's 
home exhibiting a wider range of performance characteristics, 
including, at times, lower delivery capacity. (Cirker, No. 30 at p. 1)
    Based on its current market assessment, DOE has tentatively 
determined that the conclusions reached in the April 2010 Final Rule 
remain valid. Heat pump electric storage water heaters and electric 
resistance water heaters use electricity as the fuel source. They both 
offer similar capacities as evidenced by first hour ratings certified 
to DOE, which range between 29 gallons and 80 gallons for electric 
resistance storage water heaters and between 41 gallons and 95 gallons 
for heat pump electric storage water heaters. Finally, DOE has not 
identified any unique performance-related features offered by either 
heat pump electric storage water heaters or electric resistance storage 
water heaters. As discussed in the Venting Interpretive Final Rule, DOE 
considers performance-related features to be those aspects of the 
appliance with which the consumer interacts during operation of the 
product. 86 FR 73947, 73955.
    For consumer water heaters, which are products that traditionally 
do not receive daily consumer interaction, storage capacity and 
delivery capacity are the main performance features that impact 
consumer utility. Water heater capacity reflects that amount of hot 
water available to the consumer for use, and this also impacts the 
efficiency of the product. Hence, DOE has currently-established 
standards which take into account capacity ranges for consumer water 
heaters. On the other hand, the technology used to heat the water, heat 
pump or electric resistance, is not something a consumer would interact 
with during operation of the water heater. As a result, DOE maintains 
its position from the April 2010 Final Rule and the March 2022 
Preliminary Analysis that heat pump electric storage water heaters and 
electric resistance storage water heaters do not warrant separate 
product classes.
Plug-In and Split-System Heat Pump Electric Storage Water Heaters
    While DOE has tentatively determined that heat pump electric 
storage water heaters do not warrant their own product class, NYSERDA 
also recommended that DOE create additional definitions and product 
classes for plug-in (120 volt (V)/15 ampere (A)) and split-system heat 
pump electric storage water heaters to allow these products to enter 
the market and increase market share. (NYSERDA, No. 35 at pp. 6-7) 
NEEA, ACEEE, and NWPCC also urged DOE to consider plug-in heat pump 
water heaters in its analysis and to consider whether a separate 
standard for them would be warranted, given that they are expected to 
be commercially available by the end of 2022. (NEEA, ACEEE, and NWPCC, 
No. 47 at p. 7) The CA IOUs requested DOE create a separate product 
class (or lower efficiency levels if a separate product class is not 
possible) for split-system heat pump water heaters and plug-in heat 
pump water heaters because of their unique ability to serve 
installation scenarios that would be difficult or impossible for 
unitary (240 V) heat pump water heaters. (CA IOUs, No. 39 at p. 2)
    In response to these comments, DOE first notes that it did not 
consider plug-in heat pump water heaters in the March 2022 Preliminary 
Analysis as they were not commercially available in the U.S. market at 
the time. (See Chapter 2 of the preliminary TSD). While there are now a 
limited number of plug-in heat pump water heaters available in the U.S. 
market, DOE still does not have sufficient information to determine how 
use of plug-in voltage (120 V) and current (15 A) affects performance 
and efficiency. As a result, even if DOE were to make a determination 
that use of plug-in voltage and current constitutes a unique 
performance-related feature, the Department would be unable to make the 
necessary finding that a higher or lower efficiency standard is 
justified for these types of water heaters. DOE may consider 
establishing a separate product class for plug-in heat pump electric 
storage water heaters in a future rulemaking.
    With respect to establishing a separate product class for split-
system heat pump electric storage water heaters, DOE notes the analysis 
is very similar to what was discussed for heat pump electric storage 
water heaters. Split-system heat pump water heaters use the same fuel 
source, electricity, as other electric storage water heaters. DOE also 
has not identified any unique performance-related features offered by 
split-system heat pump water heaters that would warrant a separate 
product class consideration at this time. And, as DOE stated 
previously, the type of technology used to heat the water, in this case 
a split-system heat pump, is not something a consumer would interact 
with during operation of the water heater.
Grid-Enabled Water Heaters
    NYSERDA urged DOE to further define grid-enabled water heaters for 
consistency on connectedness. (NYSERDA, No. 35 at p. 7) In response, 
DOE notes that grid-enabled water heaters are defined in EPCA. (see 42 
U.S.C. 6295(e)(6)(A)(ii)) DOE has not found it necessary at this time 
to further define connectivity.
Small Electric Storage Water Heaters and Tabletop Water Heaters
    Current product classes for electric storage water heaters are 
based on rated storage volume (capacity) and draw pattern. See 10 CFR 
430.32(d). There are product classes for electric storage water heaters 
with storage volumes greater than 20 gallons and less than or equal to 
55 gallons, and product classes for electric storage water heaters with 
storage volumes greater than 55 gallons and less than or equal to 120 
gallons. As discussed in section III.F of this document, DOE received a 
Joint Stakeholder Recommendation for amended water heater standards, 
that included recommended standard levels for electric storage water 
heaters. In particular, the Joint Stakeholder Recommendation suggested 
setting different standards for smaller electric storage water heaters.
    In response, DOE notes that the efficiency of an electric storage 
water heaters is typically increased by adding

[[Page 49081]]

insulation to the water heater or by incorporating a new technology 
into the design, such as a heat pump. When implementing these 
technology options, the water heater's outer dimensions typically are 
increased to maintain the same internal tank size (and hold the same 
volume of water). DOE reviewed its existing product classes for 
electric storage water heaters with storage volumes less than or equal 
to 55 gallons and greater than 20 gallons to determine whether further 
subdividing these product classes is warranted. DOE's market data for 
electric storage water heaters suggests there is a certain category of 
electric storage water heaters that are limited in their physical size 
due to the places they are typically installed. Some of these water 
heaters are commonly referred to as ``lowboy'' water heaters and have 
restrictions on their physical size to facilitate installation in crawl 
spaces, in attics, and under staircases, which have finite space 
constraints that define physical size limitations for the water heater. 
The physical size limitation of the unit restricts the amount of hot 
water that can be provided to the household.
    In order to determine how to best characterize these ``small water 
heaters,'' DOE looked at the amount of hot water they produce and their 
effective storage volumes. DOE found that most ``small electric storage 
water heaters'' in the market today offer an effective storage volume 
greater than or equal to 20 gallons and less than or equal to 35 
gallons and deliver first-hour ratings less than 51 gallons. Due to 
their low capacities ``small electric storage water heaters'' fall into 
the very small or low usage draw patterns.
    Thus, DOE tentatively concludes that this restriction is a 
performance-related feature affecting energy efficiency that would 
warrant a separate product class. In addition, the physical size 
limitation constrains the technology options that can be considered to 
increase the efficiency of these water heaters. For example, the 
maximum technologically feasible efficiency level for electric storage 
water heater utilizes heat pump water heater technology. For those 
water heaters that are physically space-constrained, the max-technology 
efficiency level must be a split-system heat pump water heater since 
integrating the heat pump into the top of the tank is physically 
prohibited by the constraints of the installation. This is discussed 
further in sections IV.C.1.a and IV.C.1.b of this NOPR.
    In this proposed rulemaking, DOE has analyzed splitting the 
existing 20-55 gallon product classes for electric storage water 
heaters by establishing new ``small electric storage water heater'' 
product classes.
    The proposed electric storage product classes would be: (1) 
electric storage water heaters with an effective storage volume greater 
than or equal to 20 gallons and less than or equal to 35 gallons, with 
first-hour ratings less than 51 gallons (``small electric storage water 
heaters''); and (2) electric storage water heaters with an effective 
storage volume greater than or equal to 20 gallons and less than or 
equal to 55 gallons (excluding small electric storage water heaters). 
The electric storage product classes analyzed in this NOPR are 
summarized below in Table IV.4.

        Table IV.4--Electric Storage Water Heater Product Classes
------------------------------------------------------------------------
 
------------------------------------------------------------------------
                     Current Product Class Structure
------------------------------------------------------------------------
>=20 gallons, <=55 gallons, All draw patterns.......  >55 gallons, <=120
                                                       gallons, All draw
                                                       patterns.
------------------------------------------------------------------------
              New Product Class Structure Being Considered
------------------------------------------------------------------------
Small Electric Storage Water      >=20 gallons, <=55  >55 gallons, <=120
 Heaters >=20 gallons, <=35        gallons, All draw   gallons, All draw
 gallons, Very small and low       patterns,           patterns.
 draw patterns *.                  excluding ``small
                                   electric storage
                                   water heaters''.
------------------------------------------------------------------------
* These products are collectively referred to as ``small electric
  storage water heaters.''

    Tabletop water heaters, which typically have around 35 gallons of 
rated storage volume, also have very particular dimensions in order to 
be used as a kitchen workspace. DOE is not proposing to amend the 
standards for tabletop water heaters in this rulemaking based on the 
market assessment for these products (see section IV.C.1.a for 
details). There are only two basic models of tabletop water heaters on 
the market currently. Because of the similarities between tabletop 
water heaters and small electric storage water heaters, DOE is 
proposing to create alignment between the standards for these types of 
products. Specifically, in this NOPR, DOE proposes to amend the 
definition of ``tabletop water heater'' to specify that the tabletop 
designation of electric storage water heaters is only applicable to 
products in the very small or low draw pattern. As a result of this 
proposal (if finalized), any tabletop water heaters in the medium and 
high draw patterns would henceforth be considered in the broader 
electric storage water heater product classes. Out of the two basic 
models of tabletop water heaters certified to DOE, one is in the low 
draw pattern and will not be affected by the proposal. The other is in 
the medium draw pattern. DOE expects that this medium draw pattern 
tabletop model can be redesigned to meet the low draw pattern 
requirements with limited product conversion cost to the manufacturer.
    DOE requests comment on its proposal to limit the tabletop water 
heater designation to products in the very small and low draw patterns.
2. Technology Options
    As described in section III.C.1 of this document, DOE conducts a 
technology assessment to identify a complete list of technologies for 
consumer water heaters (``technology options'') with the potential to 
improve the UEF ratings of products. Section IV.B of this document 
describes the process by which technology options are screened in a 
separate screening analysis that aims to determine which technology 
options could feasibly be adopted based on five screening criteria. 
Finally, in the engineering analysis (section IV.C of this document), 
DOE selects the technology options that are most likely to constitute 
the design pathway to higher efficiency levels in a standards-case 
scenario (thereafter referred to as ``design options''). Thus, after 
DOE identifies a comprehensive list of technologies for the technology 
assessment, the subsequent analysis focuses only on those technologies 
that are the most likely to be implemented in response to amended 
standards.
    In the preliminary market analysis and technology assessment, DOE

[[Page 49082]]

identified numerous technology options that would be expected to 
improve the efficiency of consumer water heaters, as measured by the 
DOE test procedure. These technology options were presented in chapter 
3 of the preliminary TSD. DOE requested feedback on the technology 
options identified and on whether there are additional technologies 
available that may improve consumer water heater performance.
    In response to the March 2022 Preliminary Analysis, the Joint 
Advocates requested that DOE evaluate 120 V/15 A heat pump water 
heaters because their commercial availability is expected to increase 
throughout 2022. (Joint Advocates, No. 34 at pp. 2-3) Rheem commented 
that there will be 120 V electric water heaters, including heat pump 
water heaters, on the market during the 30-year analysis timeframe. 
(Rheem, No. 45 at p. 4) In response, DOE has included 120 V HPWHs in 
its technology assessment for electric storage heat pump water heaters 
in this NOPR. However, as described further in chapter 3 of the NOPR 
TSD, there are currently very few models of 120 V heat pump water 
heaters available on the market, and DOE has not analyzed these designs 
directly in the engineering analysis due to the lack of information on 
these models and whether these designs would constitute the most cost-
effective pathway to improved energy efficiency for electric storage 
water heaters. DOE's initial findings on the potential efficiency of 
120 V heat pump water heaters are detailed in chapter 3 of the NOPR 
TSD.
    DOE requests comment on the outlook for the emergence of 120 V heat 
pump water heaters, information regarding how their design and 
operation may differ from 240 V heat pump water heaters, and data on 
performance characteristics and efficiencies.
    Rheem recommended DOE add an inlet damper to the list of technology 
options but indicated that this technology option may not be suitable 
for the entire gas-fired storage water heater product class. Rheem 
stated that it has concerns that the technology may have limitations 
for some installation applications. (Rheem, No. 45 at p. 3) Based on 
its independent research and discussions with manufacturers, DOE 
understands the technology in question to be gas-actuated flue dampers, 
which are installed at the air intake inlet (hence the term used by the 
commenter, ``inlet damper''). The Joint Advocates urged DOE to evaluate 
gas-actuated, non-powered dampers, which require no external power 
source and instead use a self-powered gas valve to generate the power 
needed to operate, for gas-fired storage water heaters as a potentially 
lower-cost alternative to other damper technology options. (Joint 
Advocates, No. 34 at p. 2) As discussed further in chapter 3 of the 
NOPR TSD, DOE agrees with Rheem and the Joint Advocates that gas-
actuated flue dampers are a viable technology option for gas-fired 
storage water heaters and has therefore included them in its updated 
analyses for this NOPR.
    AHRI and BWC opposed DOE's inclusion of modulating burners as a 
technology option for gas-fired storage, oil-fired storage, and gas-
fired instantaneous water heaters because modulating burners are, to 
their knowledge, used only in gas-fired instantaneous water heaters in 
the consumer market. (AHRI, No. 42 at p. 3; BWC, No. 32 at p. 3) BWC 
added that adjusting the fuel-to-air ratio is typically done only in 
commercial applications (with the possible exception of consumer gas-
fired instantaneous water heaters) as it is very sophisticated and 
costly. (BWC, No. 32 at p. 3)
    In response to comments from AHRI and BWC, DOE notes that it is 
technologically feasible to use modulating burners in fossil fuel-fired 
products, and therefore, it has been included in the list of technology 
options available for consumer water heaters. However, in the 
engineering analysis of the March 2022 Preliminary Analysis, which 
constructs the main design option pathway for efficiency improvements, 
DOE had tentatively determined that modulating burners were likely to 
be used as part of the technology pathway for increasing UEF only in 
instantaneous-type gas-fired water heaters, as commenters have 
suggested. Accordingly, in this NOPR, as in the March 2022 Preliminary 
Analysis, DOE has analyzed modulating burners only for gas-fired 
instantaneous water heaters in the engineering analysis (see section 
IV.C.1.a of this document for additional discussion).
    The technology options found in this NOPR for improving UEF in 
consumer water heaters, are listed in Table IV.5 and described in 
chapter 3 of the NOPR TSD.

      Table IV.5--Potential Technologies for Increasing Efficiency
------------------------------------------------------------------------
                            Technology option
-------------------------------------------------------------------------
Heat traps.
Improved insulation:
    Increased thickness.
    Insulation on tank bottom.
    Less conductive tank materials (e.g., plastic).
    Foam insulation.
    Pipe and fitting insulation.
    Advanced insulation types:
        Aerogel.
        Vacuum panels.
        Inert gas-filled panels.
Electronic ignition systems:
    Direct spark ignition.
    Intermittent pilot ignition.
    Hot surface ignition.
Improved burners:
    Pulse combustion.
    Pressurized combustion.
    Side-arm heating.
    Two-phase thermosiphon technology.
    Modulating burners.
    Reduced burner size (slow recovery).
Heat exchanger improvements:
    Increased heat exchanger surface area.

[[Page 49083]]

 
    Enhanced flue baffle.
    Submerged combustion chamber.
    Multiple flues.
    Alternative flue geometry (Helical).
    U-Tube.
    Condensing technology.
    Induced-draft (negative vent pressure) heat exchanger.
    Direct-fired heat exchange.
Improved venting:
    Flue damper:
        Externally-powered.
        Thermopile-operated (non-powered).
        Gas-actuated (non-powered).
        Buoyancy-operated (non-powered).
    Concentric direct venting.
    Power vent.
Improved heat pump water heater components:
    Compressor improvements:
        Increased capacity.
        Increased efficiency.
        Variable-speed drive.
    Fan improvements:
        High-efficiency fan motors.
        High-efficiency fan blades.
    Expansion device improvements.
    Increased evaporator surface area.
    Increased condenser surface area.
Gas-fired absorption heat pump water heaters.
Gas-fired adsorption heat pump water heaters.
Carbon dioxide heat pump water heaters.
Thermophotovoltaic and thermoelectric generators.
Improved controls:
    Modulating controls.
------------------------------------------------------------------------

B. Screening Analysis

    DOE uses the following five screening criteria to determine which 
technology options are suitable for further consideration in an energy 
conservation standards rulemaking:
    (1) Technological feasibility. Technologies that are not 
incorporated in commercial products or in commercially viable, existing 
prototypes will not be considered further.
    (2) Practicability to manufacture, install, and service. If it is 
determined that mass production of a technology in commercial products 
and reliable installation and servicing of the technology could not be 
achieved on the scale necessary to serve the relevant market at the 
time of the projected compliance date of the standard, then that 
technology will not be considered further.
    (3) Impacts on product utility. If a technology is determined to 
have a significant adverse impact on the utility of the product to 
subgroups of consumers, or results in the unavailability of any covered 
product type with performance characteristics (including reliability), 
features, sizes, capacities, and volumes that are substantially the 
same as products generally available in the United States at the time, 
it will not be considered further.
    (4) Safety of technologies. If it is determined that a technology 
would have significant adverse impacts on health or safety, it will not 
be considered further.
    (5) Unique-pathway proprietary technologies. If a technology has 
proprietary protection and represents a unique pathway to achieving a 
given efficiency level, it will not be considered further, due to the 
potential for monopolistic concerns.
    Sections 6(b)(3) and 7(b) of appendix A.
    In summary, if DOE determines that a technology, or a combination 
of technologies, fails to meet one or more of the listed five criteria, 
it will be excluded from further consideration in the engineering 
analysis. The reasons for eliminating any technology are discussed in 
the following sections.
    The subsequent sections include comments from interested parties 
pertinent to the screening criteria, DOE's evaluation of each 
technology option against the screening analysis criteria, and whether 
DOE determined that a technology option should be excluded (``screened 
out'') based on the screening criteria.
1. Screened-Out Technologies
    The following paragraphs describe the technologies that DOE 
eliminated for failure to meet one of the following five factors: (1) 
technological feasibility; (2) practicability to manufacture, install, 
and service; (3) impacts on equipment utility or equipment 
availability; (4) adverse impacts on health or safety; and (5) unique-
pathway proprietary technologies.
    In the preliminary analysis, DOE eliminated the following 
technology options from further consideration based on the above 
criteria: advanced insulation types, condensing pulse combustion, side-
arm heating, two-phase thermosiphon technology, reduced burner size 
(slow recovery), direct-fired heat exchange, dual fuel heat pumps, 
buoyancy-operated flue dampers, gas-fired absorption and adsorption 
heat pump water heaters, and U-tube flues. Each of these technology 
options and the reasons for which they were screened out are discussed 
in detail in the preliminary TSD.
    BWC commented that some technology options listed in Table 2.3.3

[[Page 49084]]

of the preliminary TSD cannot necessarily be easily implemented in 
residential products without significant investments. (BWC, No. 32 at 
p. 2) BWC did not specify which technologies were the subject of their 
comment.
    AHRI suggested DOE's consideration of internationally available 
technologies as feasible for this rulemaking is inappropriate because 
internationally available technologies conform to different standards 
than those used in the United States, which does not guarantee that 
these technologies can be certified in the United States. (AHRI, No. 42 
at p. 3)
    As previously discussed, DOE evaluates all technology options 
identified in the technology assessment, including those that may be 
internationally available, according to the screening criteria 
enumerated in sections 6(b)(3) and 7(b) of appendix A to 10 CFR part 
430 subpart C. If a specific technology option passes all the screening 
criteria, it is retained as a design option for the engineering 
analysis. DOE notes that all of the remaining technology options that 
were not proposed to be screened out are already available in the 
United States.
    BWC suggested that it is too early for DOE to consider gas-fired 
heat pump water heaters in its analysis, noting that they are not 
currently available in the consumer market and the technology has not 
been demonstrated to be easily and cost-effectively manufactured at 
large scale to meet the demands of the consumer water heater market. 
(BWC, No. 32 at p. 3) The Joint Advocates, however, urged DOE to 
evaluate gas-fired heat pump water heaters as the max-tech level for 
gas-fired storage water heaters because gas-fired heat pump technology 
is commercially available in other product types, has been used in some 
demonstrations for water heaters, and may soon be commercially 
available for water heaters. (Joint Advocates, No. 34 at p. 2)
    In response to these comments, DOE notes that it is not statutorily 
restricted to technologies that are currently on the market when 
conducting its analyses and considering standards; however, DOE is 
required to screen out technologies which are not practicable to 
manufacture at the scale necessary to serve the relevant market at the 
time of the projected compliance date of any amended standards (see 
section 6(b)(3)(i)-(ii) of appendix A and section IV.B of this 
document). Because there are no commercially available gas-fired heat 
pump water heaters on the market yet, DOE has no data or information 
that would suggest that gas-fired heat pump technology will be 
practicable to manufacture at the necessary scale upon the compliance 
date expected for this rulemaking. Therefore, DOE proposes to screen 
out this technology option from further consideration.
    AHRI requested that DOE remove millivolt-powered (i.e., thermopile-
operated) flue dampers in the screening analysis because they are not 
used in consumer products. (AHRI, No. 42 at p. 3) Rheem recommended 
that the thermopile-operated flue damper technology option be screened 
out due to technological feasibility, agreeing with AHRI that this 
technology option is not incorporated in commercialized products. 
(Rheem, No. 45 at p. 3) BWC also urged DOE not to consider millivolt-
powered dampers as a technology option for consumer water heaters as 
they are not used domestically in consumer products. (BWC, No. 32 at p. 
2)
    DOE reviewed product literature for water heaters which have 
thermopile-operated flue dampers. These water heaters convert thermal 
energy from a standing pilot light into electricity to operate a 
damper, but such thermopiles are found only in commercial water 
heaters, which typically have substantially higher input rate standing 
pilot lights. Manufacturers generally agreed during interviews that the 
standing pilot lights in consumer water heaters are not large enough to 
power flue dampers. Consequently, DOE screened this design option out 
because it has tentatively determined that thermopile-operated flue 
dampers are not technologically feasible for consumer water heaters. 
(As discussed in section IV.C.1.a of this document, DOE is now 
considering gas-actuated flue dampers as a design option for reaching 
EL 2 without use of external electricity, as this technology has been 
demonstrated in consumer water heaters that are currently on the 
market.)
2. Remaining Technologies
    Through a review of each technology, DOE tentatively concludes that 
all of the other identified technologies listed in section IV.A.2 of 
this document met all five screening criteria to be examined further as 
design options in DOE's NOPR analysis. In summary, DOE did not screen 
out the following technology options listed in Table IV.6. These 
technology options are shown from left to right from broader categories 
to specific design options.

   Table IV.6--Remaining Technology Options as Identified in the NOPR
                                Analysis
------------------------------------------------------------------------
                            Technology option
-------------------------------------------------------------------------
Improved insulation:
    Increased thickness.
    Insulation on tank bottom.
    Less conductive tank materials (e.g., plastic).
    Foam insulation.
    Pipe and fitting insulation.
Electronic ignition systems:
    Direct spark ignition.
    Intermittent pilot ignition.
    Hot surface ignition.
Burner improvements:
    Pressurized combustion.
    Modulating burners.
Gas-fired and Oil-fired Heat exchanger improvements:
    Increased heat exchanger surface area.
    Enhanced flue baffle.
    Submerged combustion chamber.
    Multiple flues.
    Alternative flue geometry (Helical).
    Condensing technology.
    Induced-draft (negative vent pressure) heat exchanger.
Improved venting:

[[Page 49085]]

 
    Flue damper:
        Externally-powered.
        Gas-actuated (non-powered).
    Power vent.
    Concentric direct venting.
Improved heat pump water heater components:
    Compressor improvements:
        Increased capacity.
        Increased efficiency.
        Variable-speed drive.
    Fan Improvements:
        High-efficiency fan motors.
        High-efficiency fan blades.
    Expansion device improvements.
    Increased evaporator surface area.
    Increased condenser surface area.
    Carbon dioxide (alternative refrigerant) heat pump water heaters.
Improved controls:
    Modulating controls.
Heat traps (all types)
------------------------------------------------------------------------

    DOE has initially determined that these technology options are 
technologically feasible because they are being used or have previously 
been used in commercially-available products or working prototypes. DOE 
also finds that all of the remaining technology options meet the other 
screening criteria (i.e., practicable to manufacture, install, and 
service and do not result in adverse impacts on consumer utility, 
product availability, health, or safety, unique-pathway proprietary 
technologies). For additional details, see chapter 4 of the NOPR TSD.
    BWC stated that direct vent technology severely limits how much 
products can be improved due to safety-related combustion requirements. 
(BWC, No. 32 at p. 2) DOE notes that there are numerous consumer water 
heaters currently on the market using direct vent technology, which 
demonstrates that the technology can be used safely. However, though 
direct vent technology was not screened out, it has been identified as 
not significantly improving the UEF rating and therefore DOE did not 
consider it as a design option in its engineering analysis. Section 
IV.C.1.b of this document and chapter 5 of the TSD have additional 
details regarding DOE's projected design pathway for improving UEF.
    NRECA commented that heat pump water heaters currently do not 
provide the same functionality as electric resistance water heaters in 
demand response programs, do not perform as well in certain regions of 
the country, and have no alternative for consumers without access to 
natural gas in their homes. NRECA suggested that heat pump water 
heaters would not be suited for programs in which the water heater is 
controlled to stop or start operating at different times of the day and 
sometimes for multiple on/off cycles per day or per hour, because these 
``short cycles'' would reduce component lifetimes and reliability. 
NRECA also noted that heat pump water heaters require a specific 
minimum area to function properly, and many homes have a water heater 
located in a closet or small area and do not have the large space 
needed for the heat pump to operate effectively. (NRECA, No. 33 at p. 
2)
    The most recent market assessment has found several commercially-
available demand-response heat pump water heaters, suggesting that 
manufacturers are developing ways to implement control strategies in 
heat pump water heaters which allow them to meet the needs of utility 
demand-response programs. Additionally, as discussed, heat pump water 
heaters currently available on the market typically have backup 
electric resistance elements which may activate during a grid-signaled 
event if necessary and can allow the water heater to function similarly 
to an electric resistance water heater when needed. With regards to 
NRECA's concern about short-cycling, DOE expects that heat pump water 
heaters would be less likely to undergo shorter recovery periods than 
electric resistance water heaters. Heat pump water heaters take more 
time to recover when using only the compressor because the 
refrigeration cycle requires time to stabilize and begin transferring 
heat at a high output rate. The condenser coils of heat pump water 
heaters may also not be in direct contact with the water. By contrast, 
electric resistance elements are directly submerged in water and are 
capable of heating water faster because the electrical power is 
immediately converted into heat output. With respect to NRECA's 
concerns about space constraints, DOE notes that other options are 
available to consumers, such as utilizing a louvered door or ducting 
air to and from the water heater, and these options were considered as 
part of the installation cost analysis (see section IV.F.2). Finally, 
DOE agrees that air-source heat pump performance will vary depending on 
the region of the country due to varying the air conditions at the 
evaporator. To account for such differences, in the June 2023 TP Final 
Rule, DOE adopted optional metrics that manufacturers may use to make 
voluntary representations for heat pump water heaters at a range of 
alternative ambient and outdoor air conditions. As a result of these 
considerations, DOE did not screen out heat pump technology as a 
technology option for improving the UEF of electric storage water 
heaters.
    GEA and Rheem urged DOE to further evaluate the impact of ongoing 
refrigerant regulations on the viability, availability, and cost of 
heat pump water heaters. (GEA, No. 46 at p. 2; Rheem, No. 45 at p. 5) 
BWC urged DOE to consider the fact that alternative refrigerants can be 
extremely flammable, may have charge limits, operate at high pressures, 
and are often costly. BWC also noted that there is only one residential 
heat pump water heater product line on the market today that

[[Page 49086]]

utilizes CO2 \27\ as a refrigerant. (BWC, No. 32 at pp. 2-3) 
Southern Company indicated different refrigerants may be in use for 
heat pump water heaters by the implementation date of this rulemaking 
and requested that DOE account for their higher prices. (Southern 
Company, No. 31 at pp. 27-28)
---------------------------------------------------------------------------

    \27\ Commercially referred to as R744.
---------------------------------------------------------------------------

    Based on information gathered from manufacturers in confidential 
interviews after the March 2022 Preliminary Analysis, DOE has 
tentatively determined that alternative refrigerants with low global 
warming potentials (``GWP'') will be made available for use in heating 
products if refrigerant regulations that apply to heat pump water 
heaters are promulgated by the Environmental Protection Agency 
(''EPA''). While BWC appeared to be alluding to potential issues with 
hydrocarbon refrigerants, other more viable options include drop-in 
replacements, with very similar performance characteristics as R134A 
(which is a non-flammable hydrofluorocarbon blend), the primary 
refrigerant used today in heat pump water heaters. Because the future 
of refrigerant regulations remains uncertain at this time, in this 
NOPR, DOE has assumed the continued use of R134A for heat pump 
components. Hence, DOE has not screened out R134A in this analysis. DOE 
tentatively did not screen out R744 (CO2) in this analysis 
because there is no clear evidence that this constitutes a unique-
pathway proprietary technology,\28\ as BWC appears to suggest. However, 
as discussed in the engineering analysis, DOE has not assumed the use 
of R744 systems in order to meet the efficiency levels analyzed for 
heat pump water heaters because DOE does not expect this to be the most 
likely design pathway that manufacturers would take.
---------------------------------------------------------------------------

    \28\ R744 is also used in some water chiller systems developed 
by other manufacturers.
---------------------------------------------------------------------------

C. Engineering Analysis

    The purpose of the engineering analysis is to establish the 
relationship between the efficiency and cost of consumer water heaters. 
There are two elements to consider in the engineering analysis: the 
selection of efficiency levels to analyze (i.e., the ``efficiency 
analysis'') and the determination of product cost at each efficiency 
level (i.e., the ``cost analysis''). In determining the performance of 
higher-efficiency products, DOE considers technologies and design 
option combinations not eliminated by the screening analysis. For each 
product class, DOE estimates the baseline cost, as well as the 
incremental cost for the product at efficiency levels above the 
baseline. The output of the engineering analysis is a set of cost-
efficiency ``curves'' that are used in downstream analyses (i.e., the 
LCC and PBP analyses and the NIA).
    As discussed in section IV.A.1 of this document, certain classes of 
consumer water heaters currently have UEF-based standards, while for 
others EPCA's EF-based standards apply. For this NOPR, DOE analyzed 
amended UEF standards for the product classes that currently have 
standards in terms of UEF. For the product classes with EF-based 
standards, DOE developed translated standards in terms of UEF for use 
in the analysis.
    In this NOPR, DOE has analyzed standards with respect to the 
effective storage volume metric, which is described in section III.B of 
this document. Compared to rated storage volume and FHR, effective 
storage volume is a superior descriptor of the thermal energy stored in 
the hot water of the water heater, which can be made immediately 
available for consumer use, for the following reasons. The rated 
storage volume does not account for additional energy that could be 
stored due to an increase in storage tank temperature. The FHR metric 
is similar to effective storage volume; however, the FHR test allows 
the water heater to be energized and actively heating the water; 
therefore, it is not an appropriate measure of the stored energy. There 
are two types of water heaters which can cause the system to store more 
energy than would be otherwise determined by the rated storage volume, 
as discussed in the June 2023 TP Final Rule: water heaters capable of 
operating with an elevated tank temperature, and circulating water 
heaters. In the June 2023 TP Final Rule, DOE established that 
compliance with the effective storage volume provisions (and, 
relatedly, high temperature testing method and testing with separate 
storage tanks for circulating water heaters) would not be required 
until compliance with amended standards. For circulating water heaters, 
the effective storage volume of the water heater is determined by the 
measured storage volume of the separate storage tank used in testing 
because these types of water heaters are designed to operate with a 
volume of stored water in the field. 88 FR 40406, 40461-40462. Section 
V.C.1 of this document discusses the proposed approach to consider 
efficiency determinations for water heaters tested using the high 
temperature testing method.
    In this NOPR, DOE has initially determined not to propose amended 
standards for gas-fired storage water heaters (55 gal < Veff 
<= 100 gal), tabletop water heaters (20 gal <= Veff <= 120 
gal), electric instantaneous water heaters (Veff < 2 gal), 
and grid-enabled water heaters at this time based on the results of the 
market and technology assessment, screening analysis, interviews with 
manufacturers, and comments from interested parties. The market 
assessment indicates that there are no consumer gas-fired storage water 
heaters certified with storage volumes between 55 gallons and 100 
gallons in any draw patterns and that the market has shifted towards 
smaller storage volumes (between 20 gallons and 55 gallons). The market 
assessment also shows that there are only two basic models of tabletop 
water heaters certified at this time, and this segment of the market is 
not expected to grow. Electric instantaneous water heaters with storage 
volumes less than 2 gallons have very low standby losses (due to the 
small storage volume) and have recovery efficiencies of 98 percent. At 
this time, heat pump technology has not been demonstrated as being 
technologically feasible for electric instantaneous water heaters 
(excluding circulating heat pump water heaters, which are designed 
differently to operate with a large, stored volume of water). Thus, the 
technological feasibility of improved efficiencies for this product 
class remains uncertain. Details of these assessments are discussed in 
chapters 3 and 5 of the NOPR TSD.
    In response to the March 2022 Preliminary Analysis, Rheem agreed 
with DOE that heat pump technology cannot be considered to increase the 
efficiency of grid-enabled water heaters. Rheem stated that there is an 
opportunity to increase the efficiency of grid-enabled water heaters 
with an increase in insulation thickness but noted that the energy 
savings do not appear to be economically justified at this time. 
(Rheem, No. 45 at pp. 7-8) BWC, however, commented that the efficiency 
levels for grid-enabled water heaters are difficult to achieve with the 
technology options listed in Table ES.3.9 of the preliminary TSD and 
questioned the feasibility of the efficiency level above baseline. 
(BWC, No. 32 at p. 2)
    Because grid-enabled water heaters are statutorily defined as 
having electric resistance technology (see 42 U.S.C 6295(e)(6)(A)(ii)), 
heat pump technology is not applicable as a technology option for these 
water heaters and DOE has tentatively determined that the only 
technologically feasible means to further

[[Page 49087]]

improve these products would be to use thicker insulation. However, 
increased insulation offers diminishing returns for improved UEF, and 
DOE has tentatively determined that the insulation levels used in some 
models on the market are the highest that are technologically feasible 
at this time, and that further increases would not significantly 
improve UEF. Thus, DOE has not analyzed amended UEF standards for grid-
enabled water heaters.
    Table IV.7 presents the consumer water heater product classes along 
with the approach to analyzing them for this NOPR.

             Table IV.7--Analysis Approach by Product Class
------------------------------------------------------------------------
                                 Distinguishing
                                 characteristics
      Product category         (effective storage     Proposed analysis
                                volume and input
                                     rating)
------------------------------------------------------------------------
Gas-fired Storage Water       <20 gal.............  Converting EF-based
 Heater.                                             standards to UEF-
                                                     based standards.
                              >=20 gal and <=55     Amending UEF-based
                               gal.                  standards.
                              >55 gal and <=100     No amendments
                               gal.                  proposed.
                              >100 gal............  Converting EF-based
                                                     standards to UEF-
                                                     based standards.
Oil-fired Storage Water       <=50 gal............  Amending UEF-based
 Heater.                                             standards.
                              >50 gal.............  Converting EF-based
                                                     standards to UEF-
                                                     based standards.
Electric Storage Water        <20 gal.............  Converting EF-based
 Heater.                                             standards to UEF-
                                                     based standards.
                              >=20 gal and <=35     Amending UEF-based
                               gal, FHR <51 gal      standards.
                               (Small electric
                               storage water
                               heaters).
                              >=20 gal and <=55     Amending UEF-based
                               gal, excluding        standards.
                               small electric
                               storage water
                               heaters.
                              >55 gal and <=120     Amending UEF-based
                               gal.                  standards.
                              >120 gal............  Converting EF-based
                                                     standards to UEF-
                                                     based standards.
Tabletop Water Heater.......  <20 gal.............  Converting EF-based
                                                     standards to UEF-
                                                     based standards.
                              >=20 gal and <=120    No amendments
                               gal.                  proposed.
Gas-fired Instantaneous       <2 gal and <=50,000   Converting EF-based
 Water Heater.                 Btu/h.                standards to UEF-
                                                     based standards.
                              <2 gal and >50,000    Amending UEF-based
                               Btu/h.                standards.
                              >=2 gal and           Converting EF-based
                               <=200,000 Btu/h.      standards to UEF-
                                                     based standards.
Electric Instantaneous Water  <2 gal..............  No amendments
 Heater (including Low-                              proposed.
 Temperature Water Heaters).
                              >=2 gal.............  Converting EF-based
                                                     standards to UEF-
                                                     based standards.
Grid-enabled Water Heater...  >75 gal.............  No amendments
                                                     proposed.
Gas-fired Circulating Water   <=200,000 Btu/h.....  Amending UEF-based
 Heater.                                             standards to
                                                     reflect updates to
                                                     the test procedure.
Oil-fired Circulating Water   <=210,000 Btu/h.....  Amending UEF-based
 Heater.                                             standards to
                                                     reflect updates to
                                                     the test procedure.
Electric Circulating Water    <=12 kW; for heat     Amending UEF-based
 Heater.                       pump type units       standards to
                               <=24 A at <=250 V.    reflect updates to
                                                     the test procedure.
------------------------------------------------------------------------

1. Product Classes With Current UEF-Based Standards
    For product classes where DOE has analyzed amended UEF-based 
standards, DOE conducted an efficiency level analysis and a 
manufacturing cost analysis to generate cost-efficiency relationships 
that reflect the industry average manufacturing costs associated with 
each efficiency level analyzed. The following paragraphs of this 
document summarize the methodology used in these steps.
a. Efficiency Analysis
    DOE typically uses one of two approaches to develop energy 
efficiency levels for the engineering analysis: (1) relying on observed 
efficiency levels in the market (i.e., the efficiency-level approach), 
or (2) determining the incremental efficiency improvements associated 
with incorporating specific design options to a baseline model (i.e., 
the design-option approach). Using the efficiency-level approach, the 
efficiency levels established for the analysis are determined based on 
the market distribution of existing products (in other words, based on 
the range of efficiencies and efficiency-level ``clusters'' that 
already exist on the market). Using the design option approach, the 
efficiency levels established for the analysis are determined through 
detailed engineering calculations and/or computer simulations of the 
efficiency improvements from implementing specific design options that 
have been identified in the technology assessment. DOE may also rely on 
a combination of these two approaches. For example, the efficiency-
level approach (based on actual products on the market) may be extended 
using the design-option approach to ``gap fill'' levels (to bridge 
large gaps between other identified efficiency levels) and/or to 
extrapolate to the max-tech level (particularly in cases where the max-
tech level exceeds the maximum efficiency level currently available on 
the market).
    In the March 2022 Preliminary Analysis, DOE developed efficiency 
levels with a combination of the efficiency-level and design-option 
approaches. DOE conducted a market analysis of currently available 
models listed in DOE's Compliance Certification Database (``CCD'') to 
determine which efficiency levels were most representative of the 
current

[[Page 49088]]

distribution of consumer water heaters available on the market. DOE 
also completed physical teardowns of commercially available units to 
determine which design options manufacturers may use to achieve certain 
efficiency levels for each water heater category analyzed. DOE 
requested comments from stakeholders and conducted interviews with 
manufacturers concerning these initial efficiency levels, which have 
been updated in this NOPR based on the feedback DOE received.
    The efficiency levels for storage water heater classes presented in 
the March 2022 Preliminary Analysis are linear equations of UEF as a 
function of rated storage volume, while for this NOPR DOE has analyzed 
efficiency levels for UEF that are a function of effective storage 
volume (with the exception of certain levels which were analyzed in 
response to the Joint Stakeholder Recommendation). For products with 
substantial storage volumes, the UEF is expected to decrease with 
higher volumes because standby losses (i.e., energy lost from the 
stored water to the surroundings when the water heater is not actively 
heating water) are related to the temperature of the water stored and 
the size of the tank.\29\ The efficiency levels analyzed in this 
rulemaking assume that the relationships between standby losses and 
storage volume for baseline products (i.e., the slopes of the current 
standards equations) would remain consistent for higher efficiency 
levels. In other words, the higher efficiency levels are linear 
equations that are parallel to the current standards. The exception to 
this is for DOE's analysis of the Joint Stakeholder Recommendation, 
which included certain efficiency levels that were not specified as a 
function of storage volume (see Table III.1).
---------------------------------------------------------------------------

    \29\ As discussed in section III.B of this document, the 
effective storage volume metric accounts for both temperature and 
tank size, whereas rated storage volume alone only accounts for tank 
size.
---------------------------------------------------------------------------

    In response to the efficiency levels presented in the March 2022 
Preliminary Analysis, NYSERDA stated that reducing standards by rated 
storage volume is unnecessary and recommended that DOE's proposed 
standard levels either not change or increase by capacity, as it is 
more typical of appliance standards and there are models at larger 
volumes with higher UEFs. (NYSERDA, No. 35 at p. 6) NEEA, ACEEE, and 
NWPCC urged DOE to consider whether less stringent standards for gas-
fired storage water heaters with larger storage volumes are justified, 
given that smaller gas-fired storage water heaters can meet similar 
FHRs. (NEEA, ACEEE, and NWPCC, No. 47 at p. 7)
    As discussed, larger storage water heaters are more susceptible to 
standby losses due to the increased surface area of the storage tank 
when compared to smaller storage water heaters with the same design 
options. Standards that stay the same do not account for this fact; DOE 
therefore maintained its current approach and analyzed efficiency 
levels that are equations that decrease linearly as effective storage 
volume increases for all levels except those suggested by the Joint 
Stakeholder Recommendation (because the Joint Stakeholder 
Recommendation explicitly suggested flat-line standards for electric 
storage water heaters). Further, DOE understands NYSERDA's reference to 
``capacity'' to refer to delivery capacity of the water heater--which 
is either FHR or Maximum GPM. Draw patterns, which are described in 
section IV.A.1 of this document, are bins of delivery capacity ranging 
from very small to high delivery capacity. DOE's current standards 
already increase in stringency with draw pattern (see 10 CFR 
430.32(d)), and this increase in stringency was retained in the 
efficiency level analyses of the March 2022 Preliminary Analysis and 
this NOPR.
    In this NOPR, DOE has revised the efficiency levels analyzed in the 
March 2022 Preliminary Analysis for electric storage water heaters, 
gas-fired storage water heaters, and gas-fired instantaneous water 
heaters. The details of the efficiency level analysis are presented in 
chapter 5 of the NOPR TSD, and a summary of these updates is discussed 
here. For electric storage water heaters, DOE has included additional 
levels for heat pump water heaters based on the standard levels 
recommended in the Joint Stakeholder Recommendation. For gas-fired 
storage water heaters, DOE revised its max-tech efficiency levels after 
conducting an updated market assessment for the NOPR analysis. DOE has 
tentatively determined that it is possible for gas-fired storage water 
heaters to surpass the max-tech levels chosen in the March 2022 
Preliminary Analysis. Thus, DOE selected revised max-tech efficiency 
levels for this NOPR based on new product certifications and 
confidential manufacturer feedback. For gas-fired instantaneous water 
heaters, DOE analyzed an additional efficiency level for this NOPR that 
was not evaluated in the March 2022 Preliminary Analysis. In the 
updated market assessment for this NOPR, DOE observed a greater number 
of models at the levels specified in the ENERGY STAR v5.0 specification 
\30\ than at the time of the March 2022 Preliminary Analysis; thus, 
efficiency levels corresponding to the ENERGY STAR v5.0 specification 
were added. DOE also reduced its max-tech efficiency levels based on 
feedback from stakeholders and a review of the current market and 
technologies at the time of this NOPR analysis.
---------------------------------------------------------------------------

    \30\ EPA's ENERGY STAR v5.0 specification is available online 
at: www.energystar.gov/sites/default/files/asset/document/ENERGY%20STAR%20Residential%20Water%20Heaters%20Version%205%20Specification%20and%20Partner%20Commitments.pdf (Last accessed on April 1, 
2023).
---------------------------------------------------------------------------

    These changes to the efficiency levels are discussed in further 
detail in the sub-sections that follow.
Baseline Efficiency
    For each product class, DOE generally selects a baseline model as a 
reference point for each class and measures changes resulting from 
potential energy conservation standards against the baseline. The 
baseline model in each product class represents the characteristics of 
a product/equipment typical of that class (e.g., capacity, physical 
size). Generally, a baseline model is one that just meets current 
energy conservation standards, or, if no standards are in place, the 
baseline is typically the most common or least efficient unit on the 
market. For this NOPR, the baseline efficiency levels for product 
classes with current UEF-based standards are equal to the current 
energy conservation standards (see Table II.1).
Higher Efficiency Levels
    As part of DOE's analysis, the maximum available efficiency level 
is the highest efficiency unit currently available on the market. DOE 
also defines a ``max-tech'' efficiency level to represent the maximum 
possible efficiency for a given product.
    In the March 2022 Preliminary Analysis, the max-tech efficiency 
levels generally corresponded to the maximum available efficiency level 
on the market. DOE also analyzed multiple intermediate efficiency 
levels between the baseline and max-tech in order to develop the cost-
efficiency relationship for each product class. Intermediate efficiency 
levels were chosen based on the market assessment where there were 
clear groupings in the market's efficiency distribution. In some cases, 
efficiency levels were observed for one draw pattern but not the 
others.
    In response to the March 2022 Preliminary Analysis, BWC requested

[[Page 49089]]

DOE clarify how max-tech levels were determined for draw patterns where 
products do not yet exist. (BWC, No. 32 at p. 2)
    In this NOPR, DOE has constructed cost versus efficiency curves for 
the representative capacities and representative draw patterns which 
exist on the market today, as opposed to directly analyzing every 
possible draw pattern. However, DOE is proposing to increase stringency 
of standards for draw patterns where products do not currently exist in 
order to match the stringency of standards for draw patterns where 
products in the same category do exist, in the event that products 
become available with draw patterns not currently on the market.
    For these cases, DOE estimated these max-tech levels using existing 
relationships between efficiency levels observed in other draw patterns 
where products do exist. Products in different draw patterns are 
typically differentiated by rated storage volume and heating capacity 
(burner input rate, compressor capacity, or element wattage), and the 
design options used to improve UEF in one draw pattern can generally 
also be applied to water heaters of the same type in a different draw 
pattern. For the cases where products at additional intermediate 
efficiency levels were observed in the market at one draw pattern but 
not the others, DOE estimated efficiency levels in the other draw 
patterns based on what was observed for the one available draw pattern. 
The approach took into account how each product type's efficiency 
correlates to its delivery capacity (i.e., either FHR or maximum GPM, 
the delivery capacity metrics assigned for non-flow-activated water 
heaters and flow-activated water heaters, respectively), recovery 
efficiency, and technological feasibility of design option 
implementation. A detailed discussion of efficiency level selection on 
a product-class by product-class basis is provided in chapter 5 of the 
NOPR TSD.
    The following paragraphs provide additional discussion of the 
comments received in response to the efficiency levels analyzed in the 
March 2022 Preliminary Analysis and any updates made to the NOPR 
efficiency level analysis to address stakeholder concerns. Interested 
parties provided comments on electric storage water heaters, gas-fired 
storage water heaters, and gas-fired instantaneous water heaters.
i. Electric Storage Water Heaters
    The efficiency levels above the baseline that were analyzed in the 
March 2022 Preliminary Analysis are shown in Table IV.8.

        Table IV.8--March 2022 Preliminary Analysis Efficiency Levels for Electric Storage Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                                  Draw pattern
              EL              ----------------------------------------------------------------------------------
                                Very small            Low                   Medium                  High
----------------------------------------------------------------------------------------------------------------
       Rated Storage Volume (Vr) Greater Than or Equal to 20 Gallons and Less Than or Equal to 55 Gallons
----------------------------------------------------------------------------------------------------------------
1............................          N/A     0.9381-0.0003 x Vr     0.9390-0.0002 x Vr     0.9450-0.0001 x Vr
2............................          N/A     3.3048-0.0003 x Vr     3.3590-0.0002 x Vr     3.4742-0.0001 x Vr
3............................          N/A     3.7048-0.0003 x Vr     3.7590-0.0002 x Vr     3.8742-0.0001 x Vr
----------------------------------------------------------------------------------------------------------------
                        Vr Greater than 55 Gallons and Less Than or Equal to 120 Gallons
----------------------------------------------------------------------------------------------------------------
1............................          N/A                    N/A     3.4133-0.0011 x Vr     3.5380-0.0011 x Vr
2............................          N/A                    N/A     3.9633-0.0011 x Vr     4.0880-0.0011 x Vr
----------------------------------------------------------------------------------------------------------------

    EEI expressed concern that some UEF requirements analyzed in the 
March 2022 Preliminary Analysis are too high for electric resistance 
water heaters with rated storage volumes less than 55 gallons, stating 
that there is a large difference between EL 1 and EL 2 in the 
preliminary analysis and there may be many water heaters between these 
levels. (EEI, No. 31 at pp. 34-35) NEEA, ACEEE, and NWPCC urged DOE to 
create a new heat pump efficiency level between the preliminary 
analysis EL 2 and EL 3 for electric storage water heaters between 20 
and 55 gallons, because many such models are currently available 
between these two efficiency levels. NEEA, ACEEE, and NWPCC 
specifically recommended a new efficiency level at a UEF of 3.50 for a 
representative storage volume of 45 gallons in the medium draw pattern. 
(NEEA, ACEEE, and NWPCC, No. 47 at p. 7) Then, as discussed in section 
III.F of this document, the Joint Stakeholders recommended that DOE 
analyze specific efficiency levels for electric storage water heaters, 
some of which were not evaluated for the preliminary analysis (at 2.0, 
2.3, and 2.5 UEF depending on the draw pattern, storage volume and 
height). (Joint Stakeholders, No. 49 at p. 2)
    In this NOPR, DOE has revised EL 1 for electric storage water 
heaters with effective storage volumes between 20 and 55 gallons 
(excluding small electric storage water heaters). In the March 2022 
Preliminary Analysis, EL 1 represented an incremental improvement in 
efficiency over the baseline through the implementation of increased 
insulation thickness to reduce standby losses. However, DOE received 
feedback from multiple sources indicating that increasing the thickness 
may not be practical in the manufacturing process because the R-value 
of polyurethane diminishes when the compound is blown into larger 
cavities, and the increase in thickness does not offset the increase in 
water heater surface area (which will increase standby losses). Thus, 
in this NOPR, DOE considered a different stringency for EL 1 for 
electric storage water heaters, which would be more representative of 
the next level up from baseline and would currently be met using heat 
pump technology. Specifically, DOE considered the efficiency level 
recommended in the Joint Stakeholder Recommendation as EL 1 for the 
NOPR, a UEF of 2.30.
    On July 18, 2022, EPA published a final draft of the ENERGY STAR 
v5.0 specifications for water heaters, which went into effect on April 
18, 2023. The UEF requirements for ENERGY STAR v5.0 can only be met by 
heat pump technology. For integrated 240 V heat pump water heaters, the 
minimum UEF must be 3.30. This stringency generally corresponds to EL 2 
in this NOPR analysis. For integrated 120 V heat pump water heaters and 
split-system heat pump water heaters, the minimum UEF must be 2.20, 
which is similar to the efficiency level recommended by the Joint 
Stakeholders.

[[Page 49090]]

    DOE is aware that ongoing State efforts to decarbonize heating 
appliances may lead to an increased demand for 120 V heat pump water 
heaters, which do not need a 240 V electrical connection in order to 
transition from a gas-fired storage water heater to an electric one. As 
indicated by comments from interested parties that are discussed in 
section IV.A.2 of this document, multiple manufacturers are developing 
120 V heat pump water heaters, and these products are now close to 
becoming commercially-available.\31\ However, as suggested by ENERGY 
STAR's less stringent requirement for 120 V and split-system heat pump 
water heaters, these types of heat pump water heaters may not be able 
to achieve the same efficiencies as 240 V integrated heat pump water 
heaters. Reasons for this are discussed further in chapter 3 of the 
TSD. In its updated market assessment, DOE observed that currently 
certified 120 V heat pump water heaters can meet the ENERGY STAR v5.0 
criteria, and a UEF of 2.20 generally aligns with the lowest heat pump 
water heaters efficiencies available. DOE has tentatively determined 
that the efficiency levels proposed by the Joint Stakeholders would not 
prevent novel 120 V products from entering the market based on the UEF 
efficiencies these products are reported to attain in CCD and ENERGY 
STAR certification databases.
---------------------------------------------------------------------------

    \31\ EPA's ENERGY STAR qualified product database includes 
listings for 120 V heat pump water heaters. This database can be 
accessed online at www.energystar.gov/productfinder/product/certified-water-heaters/results (Last accessed on Jan. 24, 2023).
---------------------------------------------------------------------------

    Therefore, the redefinition of EL 1 from an electric resistance 
efficiency level to a low-efficiency heat pump efficiency level reduces 
the difference in stringency between EL 1 and EL 2, which may address 
the concern raised by EEI.
    For small electric storage water heaters, limitations in split-
system heat pump technology result in a lower max-tech efficiency level 
than for the non-small classes. DOE analyzed one efficiency level above 
the baseline (which is also the max-tech efficiency level) that 
corresponds to a UEF of 2.00. This efficiency level was suggested by 
the Joint Stakeholders. DOE verified that this level was representative 
of a split-system heat pump small electric storage water heater based 
on teardown data as well as market data on the performance of other 
heat pump water heaters on the market today (this is discussed further 
in chapter 5 of the TSD).
    In response to the comment by NEEA, ACEEE, and NWPCC, DOE has not 
been able to determine whether there are any substantial differences in 
design options for 45-gallon electric storage water heaters rated at 
3.35 UEF versus 3.50 UEF. In this NOPR, DOE has tentatively determined 
that the use of an electronic expansion valve, electronically 
commutated fan motors (``ECM'' fans), and appreciable increases in heat 
exchanger surface areas can allow the majority of the market to achieve 
a UEF of 3.35 for a 45-gallon product in the medium draw pattern and a 
UEF of 3.47 for a 55-gallon product in the high draw pattern.
    DOE seeks further information that would assist in potentially re-
evaluating the stringency of EL 2, especially data regarding the 
technologies employed in 45-gallon medium draw pattern products at a 
UEF of 3.50.
    NEEA, ACEEE, and NWPCC reiterated that, in establishing the max-
tech level, the statute does not require DOE to consider only 
technologies that are commercially available. Therefore, NEEA, ACEEE, 
and NWPCC recommended that DOE consider establishing a ``heat pump-
only'' level, which would exclude the use of electric resistance 
elements, as max tech for heat pump water heaters. NEEA, ACEEE, and 
NWPCC added that the majority of heat pump water heaters already offer 
a ``heat pump-only mode'' and that this design change would improve in-
field efficiency simply through the removal of the resistance element. 
(NEEA, ACEEE, and NWPCC, No. 47 at pp. 7-8)
    In response, DOE notes that its own test data indicate that heat 
pump water heaters with backup electric resistance elements typically 
do not use the elements during DOE's 24-hour simulated use test. 
Therefore, adding an efficiency level that corresponds to a ``heat-pump 
only'' design option as max tech would not be expected to change the 
UEF.
    AHRI and BWC requested that DOE specifically include ``lowboy'' 
\32\ electric storage water heaters in addition to short and tall 
models in its analysis. (AHRI, No. 42 at p. 4; BWC, No. 32 at pp. 1-2) 
Rheem expressed concern that lowboy electric storage water heaters were 
not properly addressed and requested that DOE separately examine lowboy 
electric storage water heaters. Rheem specifically requested that DOE 
include low-income consumers in the consumer subgroup analysis with a 
focus on how the removal of lowboy water heaters through the standards 
process will affect this group. (Rheem, No. 45 at pp. 5-6) Rheem 
suggested DOE's provided shipping dimensions for short electric storage 
water heaters do not align with typical dimensions for lowboy water 
heaters in medium and high draw patterns for EL 2. Rheem added that, 
for the low draw pattern, however, the height and diameter DOE provided 
(when accounting for shipping materials) is within the range of typical 
dimensions for lowboy water heaters. (Rheem, No. 45 at p. 6)
---------------------------------------------------------------------------

    \32\ Lowboy water heaters are electric storage water heaters 
which are typically under 36 inches tall, with fittings considered.
---------------------------------------------------------------------------

    Lowboy water heaters are suitable for an installation arrangement 
commonly found in apartments and condominiums. In order to store a 
volume of water that is similar to the volume of a non-lowboy water 
heater, lowboy water heaters typically have a much wider aspect ratio 
as compared to non-lowboy water heaters, while still maintaining 
diameters that can fit through standard doorways. In the March 2022 
Preliminary Analysis, DOE did not analyze lowboy aspect ratios for 
every draw pattern. Instead, the approach focused on ``tall'' and 
``short'' aspect ratios--where ``short'' aspect ratios included some 
lowboy water heaters but also other mid-height products. In this NOPR, 
DOE revised its analysis to consider lowboy water heaters as the 
representative design aspect ratio for small electric storage water 
heaters. DOE developed efficiency levels and manufacturer production 
costs (``MPCs'') to specifically reflect lowboy water heaters for that 
product class given the prevalence of these designs as small electric 
storage water heaters. (Chapter 3 and Appendix 3A to the NOPR TSD 
provides additional details on the market distribution of lowboy water 
heaters.)
    Rheem noted that for the medium and high draw patterns, efficiency 
levels that would require the use of heat pump technology appear to be 
appropriate for ``short'' and ``tall'' aspect ratios but would not be 
possible for lowboy water heaters due to the physical limitations of 
the installation space. Rheem added that there are no commercially 
available heat pump water heaters in the low draw pattern capable of 
being installed in space-constrained applications and for direct 
replacement of lowboy water heaters. (Rheem, No. 45 at pp. 6-7) Rheem 
suggested that if DOE were to amend the electric storage water heater 
standards to a level that would require heat pump technology and did 
not create a separate product class for lowboy water heaters, then 
replacements would likely be electric instantaneous water heaters, 
which would not result in efficiency gains and would increase the cost 
of water heating

[[Page 49091]]

for customers switching from lowboy water heaters. (Rheem, No. 45 at p. 
7) The Joint Stakeholders recommended DOE maintain an electric 
resistance-level standard for electric storage water heaters that are 
between 30 and 35 gallons in storage volume and under 36 inches in 
height. (Joint Stakeholders, No. 49 at p. 2)
    As discussed in section IV.A.1.d of this NOPR, DOE is considering a 
separate product class for small electric storage water heaters. DOE 
recognizes the specific design considerations of small electric storage 
water heaters and has updated its analyses to account for a unique 
design option pathway for these water heaters. For this NOPR 
engineering analysis, DOE considered lowboy designs to be 
representative models for the small electric storage water heater 
product class. As Rheem suggests, the typical application of lowboy 
water heaters may prohibit the use of an integrated heat pump design 
wherein the heat pump components sit on top of the water tank (these 
components typically add around 12 inches to the height of a water 
heater). However, an alternative to integrating the heat pump 
components into the tank would be a split-system heat pump where the 
heat pump is located somewhere other than on top of the tank. In its 
market assessment, and as discussed in the June 2023 TP Final Rule, DOE 
identified circulating heat pump water heaters designed to be paired 
with a storage-type water heater in the field (resulting in a split-
system heat pump water heater). Details of these products can be found 
in chapter 3 of the NOPR TSD. DOE expects that split-system heat pump 
designs could be used in applications with the height restrictions that 
are currently served by lowboy water heaters because the heat pump 
componentry can be located remotely from the storage tank. Therefore, 
in this NOPR engineering analysis, DOE tentatively determined that the 
design pathways for small electric storage water heaters would use 
split-system heat pump designs, whereas other electric storage water 
heaters could achieve higher efficiency levels using integrated heat 
pump designs. However, DOE's analyses of circulating heat pump water 
heaters have led the Department to initially determine that such split-
system heat pump water heaters may have efficiency limitations due to 
piping losses, limited heat transfer surface area, and pump operation. 
Therefore, the max-tech efficiency of a split-system heat pump water 
heater is expected to be lower than that of an integrated heat pump 
water heater. Based on its market assessment, only one efficiency level 
above baseline was analyzed for small electric storage water heaters. 
There are very few split-system designs on the market today, so DOE 
requests additional information from commenters on these types of 
designs and the potential UEFs that can be achieved.
    DOE requests comment on the potential design specifications, 
manufacturing processes, and efficiencies of split-system heat pump 
water heaters.
ii. Gas-Fired Storage Water Heaters
    The higher efficiency levels analyzed in the March 2022 Preliminary 
Analysis are shown in Table IV.9.

        Table IV.9--March 2022 Preliminary Analysis Efficiency Levels for Gas-Fired Storage Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                                  Draw pattern
              EL              ----------------------------------------------------------------------------------
                                Very small            Low                   Medium                  High
----------------------------------------------------------------------------------------------------------------
1............................          N/A   0.6251 - 0.0019 x Vr   0.6646 - 0.0017 x Vr   0.7024 - 0.0013 x Vr
2............................          N/A   0.6451 - 0.0019 x Vr   0.7046 - 0.0017 x Vr   0.7424 - 0.0013 x Vr
3............................          N/A   0.6551 - 0.0019 x Vr   0.7146 - 0.0017 x Vr   0.7524 - 0.0013 x Vr
4............................          N/A   0.7651 - 0.0019 x Vr   0.8146 - 0.0017 x Vr   0.8624 - 0.0013 x Vr
5............................          N/A   0.8251 - 0.0019 x Vr   0.8746 - 0.0017 x Vr   0.9224 - 0.0013 x Vr
----------------------------------------------------------------------------------------------------------------

    NEEA, ACEEE and NWPCC urged DOE to consider gas-fired heat pump 
water heaters as the basis for the max-tech efficiency level because 
they are technologically feasible and are expected to be commercially 
available by 2025. NEEA, ACEEE and NWPCC also added that the statute 
requires DOE to consider max-tech as the maximum technologically 
feasible technology that has been shown to achieve high levels of 
efficiency under field conditions but does not limit DOE to 
commercially available products. (NEEA, ACEEE, and NWPCC, No. 47 at p. 
11)
    As discussed in section IV.B.1 of this document, DOE has 
tentatively determined that gas-fired heat pump water heaters do not 
meet the screening criteria and as such has screened them out for this 
NOPR analysis. Consequently, the max-tech efficiency level does not 
reflect use of gas-fired heat pump water heater technology.
    Rheem recommended that EL 3 for gas-fired storage water heaters 
include the electric flue damper, fan-assist, and power vent technology 
options and increase the UEF of EL 3 to 0.63, 0.68, and 0.70 for the 
low, medium, and high draw patterns, respectively. (Rheem, No. 45 at p. 
4) In response, DOE determined the efficiency levels for gas-fired 
storage water heaters based on common design options manufacturers use 
to increase efficiency and achieve incremental gains in UEF. The UEF 
levels DOE analyzed for EL 3 for gas-fired storage water heaters 
correspond with the specified representative effective storage volumes 
for each draw pattern, which were determined based on the distribution 
of storage volumes observed in units currently available on the market; 
DOE notes that Rheem did not specify what storage volumes its suggested 
UEF levels for EL 3 are based on.
    Rheem recommended that DOE remove the thermopile flue damper 
technology option from EL 2 or replace it with an inlet damper. (Rheem, 
No. 45 at p. 4) AHRI stated that millivolt-powered dampers are not used 
in consumer products and questioned the validity of the MPCs developed 
for EL 2 of gas-fired storage water heaters, given that this efficiency 
level includes millivolt-powered dampers in its design. (AHRI, No. 42 
at p. 3) NEEA, ACEEE, and NWPCC urged DOE to consider gas pressure-
actuated non-powered dampers in its list of technology options to reach 
EL 2 for storage water heaters because they could be a lower cost 
pathway than the other technologies considered for EL 2. NEEA, ACEEE, 
and NWPCC added that testing performed by The Gas Technology Institute 
(``GTI'') indicates the incremental cost of such technology is $38.43. 
(NEEA, ACEEE, and NWPCC, No. 47 at p. 11)

[[Page 49092]]

    As discussed previously in section IV.B.1of this document, DOE 
agrees with these commenters that millivolt and thermopile flue dampers 
are not applicable to consumer water heaters and has thus screened them 
out from further analysis in this NOPR. Instead, DOE has implemented 
the gas-actuated damper technology option for EL 2 for gas-fired 
storage water heaters.
    Additionally, in the March 2022 Preliminary Analysis, DOE presented 
three different design option pathways to achieve EL 2 for gas-fired 
storage water heaters. These three pathways account for potential 
differences in installation requirements, such as the requirement to 
have electricity supply or a need for induced-draft ventilation to 
compensate for longer vent lengths. However, in this NOPR, DOE has 
removed the pathway consisting of an induced-draft ventilation system 
due to the technological similarities between such an approach and the 
design options most likely to be implemented for EL 3. Further details 
of this change are provided in chapter 5 of the NOPR TSD.
iii. Gas-Fired Instantaneous Water Heaters
    The higher efficiency levels analyzed in the March 2022 Preliminary 
Analysis are shown in Table IV.9.

     Table IV.9--March 2022 Preliminary Analysis Efficiency Levels for Gas-Fired Instantaneous Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                                           Draw pattern
                       EL                        ---------------------------------------------------------------
                                                    Very small          Low           Medium           High
----------------------------------------------------------------------------------------------------------------
1...............................................             N/A             N/A            0.87            0.89
2...............................................             N/A             N/A            0.91            0.93
3...............................................             N/A             N/A            0.96            0.97
----------------------------------------------------------------------------------------------------------------

    In response to the March 2022 Preliminary Analysis, the Joint 
Stakeholders suggested DOE analyze an EL 2 for gas-fired instantaneous 
water heaters that is the same as was evaluated in the March 2022 
Preliminary Analysis. (Joint Stakeholders, No. 49 at p. 2) The 
efficiency level recommended by the Joint Stakeholders has been 
analyzed as EL 2 in this NOPR.
    Rheem suggested that the UEF levels at EL 3 should be reduced to 
0.93 and 0.96 for the medium and high draw patterns, respectively, as 
these would be more representative of the maximum UEF levels currently 
available on the market. (Rheem, No. 45 at p. 7)
    Based on its review of the CCD, DOE tentatively agrees that the UEF 
levels suggested by Rheem are more representative of currently 
available products and notes that it has updated its proposed UEF 
levels for gas-fired instantaneous water heaters at max-tech to the 
maximum-available UEF levels found on the market.
    In the ENERGY STAR v5.0 specification for water heaters, gas-fired 
instantaneous water heaters must have UEF greater than or equal to 
0.95, provide a maximum GPM rating of at least 2.8 gpm over a 67 [deg]F 
temperature rise, and meet other warranty and safety criteria to meet 
the ENERGY STAR v5.0 specification. A maximum GPM rating of 2.8 gpm and 
above corresponds to the medium and high draw patterns in Table II of 
the appendix E test procedure. For this NOPR, DOE analyzed a 0.95 UEF 
efficiency level for the high draw pattern (EL 3), which corresponds to 
the ENERGY STAR level, as DOE expects that ENERGY STAR will drive a 
significant portion of the market to this level. However, through DOE's 
market and technology assessment, supplemented by feedback from 
confidential manufacturer interviews, the Department has tentatively 
determined that a UEF of 0.95 is currently not technologically feasible 
for gas-fired instantaneous water heaters in the medium draw pattern. 
Through teardown analyses (discussed in chapter 5 of the NOPR TSD), DOE 
has observed that the efficiency for these products is closely 
correlated to the heat exchanger surface area. Yet, as the surface area 
increases, so does the delivery capacity. As a result, the highest-
efficiency gas-fired instantaneous water heaters (i.e., those at 0.95 
UEF or higher) are in the high draw pattern. Therefore, DOE did not 
analyze a UEF level of 0.95 for the medium draw pattern. Rather, at EL 
3 for the medium draw pattern, DOE analyzed 0.92 UEF, which reflects a 
more achievable efficiency for this product class and requires the use 
of analogous technology as for the ENERGY STAR efficiency level of 0.95 
UEF for the high draw pattern product class.
Efficiency Levels by Product Class
    DOE's NOPR analysis for efficiency levels above baseline is 
discussed in more detail in chapter 5 of the NOPR TSD. Efficiency 
levels, including baseline and higher efficiencies, across all product 
classes are listed in the tables that follow. The efficiency levels 
which correspond closely to the Joint Stakeholder Recommendation are 
indicated with ``JSR''.

                                Table IV.10--Gas-Fired Storage: 20 gal <=Veff <=55 gal, Standard, Low, and Ultra Low NOX
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            UEF
        Efficiency level         -----------------------------------------------------------------------------------------------------------------------
                                          Very small *                       Low                         Medium                         High
--------------------------------------------------------------------------------------------------------------------------------------------------------
0 (Baseline)....................     0.3456 - (0.0020 x Veff)      0.5982 - (0.0019 x Veff)      0.6483 - (0.0017 x Veff)      0.6920 - (0.0013 x Veff)
1...............................     0.3725 - (0.0020 x Veff)      0.6251 - (0.0019 x Veff)      0.6646 - (0.0017 x Veff)      0.7024 - (0.0013 x Veff)
2 (JSR).........................     0.3925 - (0.0020 x Veff)      0.6451 - (0.0019 x Veff)      0.7046 - (0.0017 x Veff)      0.7424 - (0.0013 x Veff)
3...............................     0.4025 - (0.0020 x Veff)      0.6551 - (0.0019 x Veff)      0.7146 - (0.0017 x Veff)      0.7524 - (0.0013 x Veff)
4...............................     0.5125 - (0.0020 x Veff)      0.7651 - (0.0019 x Veff)      0.8146 - (0.0017 x Veff)      0.8624 - (0.0013 x Veff)
5 (Max-Tech)....................     0.5725 - (0.0020 x Veff)      0.8251 - (0.0019 x Veff)      0.8746 - (0.0017 x Veff)      0.9424 - (0.0013 x Veff)
--------------------------------------------------------------------------------------------------------------------------------------------------------
* No products exist in the very small draw pattern at the time of this analysis. DOE applied the differences in efficiency levels from the low draw
  pattern to define the Efficiency Levels 1 through 5 for the very small draw pattern.


[[Page 49093]]


                                                      Table IV.11--Oil-Fired Storage: Veff <=50 gal
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            UEF
        Efficiency level         -----------------------------------------------------------------------------------------------------------------------
                                          Very small *                      Low *                       Medium *                        High
--------------------------------------------------------------------------------------------------------------------------------------------------------
0 (Baseline)....................     0.2509 - (0.0012 x Veff)      0.5330 - (0.0016 x Veff)      0.6078 - (0.0016 x Veff)      0.6815 - (0.0014 x Veff)
1...............................     0.2709 - (0.0012 x Veff)      0.5530 - (0.0016 x Veff)      0.6278 - (0.0016 x Veff)      0.7015 - (0.0014 x Veff)
2 (Max-Tech)....................     0.2909 - (0.0012 x Veff)      0.5730 - (0.0016 x Veff)      0.6478 - (0.0016 x Veff)      0.7215 - (0.0014 x Veff)
--------------------------------------------------------------------------------------------------------------------------------------------------------
* No products exist in these draw patterns at the time of this analysis. DOE applied the differences in efficiency levels from the high draw pattern to
  define the Efficiency Levels 1 and 2 for the other draw patterns.


                    Table IV.12--Small Electric Storage: 20 gal <=Veff <=35 gal, FHR <51 gal
----------------------------------------------------------------------------------------------------------------
                                                                                  UEF
                  Efficiency level                   -----------------------------------------------------------
                                                           Very mmall [dagger]                   Low
----------------------------------------------------------------------------------------------------------------
0 (Baseline)........................................     0.8808 - (0.0008 x Veff)      0.9254 - (0.0003 x Veff)
1 (JSR).............................................                       2.00 *                          2.00
----------------------------------------------------------------------------------------------------------------
* DOE applied the Joint Stakeholder Recommendation for low draw pattern units to the very small draw pattern in
  its analysis.
[dagger] No products exist in the very small draw pattern at the time of this analysis.


                                 Table IV.13--Electric Storage: 20 gal <=Veff <=55 gal, Excluding Small Electric Storage
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            UEF
        Efficiency level         -----------------------------------------------------------------------------------------------------------------------
                                          Very small **                      Low                         Medium                         High
--------------------------------------------------------------------------------------------------------------------------------------------------------
0 (Baseline)....................     0.8808 - (0.0008 x Veff)      0.9254 - (0.0003 x Veff)      0.9307 - (0.0002 x Veff)      0.9349 - (0.0001 x Veff)
1 (JSR).........................                       2.30 *                          2.30                          2.30                          2.30
2...............................     3.2602 - (0.0008 x Veff)      3.3048 - (0.0003 x Veff)      3.3590 - (0.0002 x Veff)      3.4742 - (0.0001 x Veff)
                                                     [dagger]
3 (Max-Tech)....................     3.6602 - (0.0008 x Veff)      3.7048 - (0.0003 x Veff)      3.7590 - (0.0002 x Veff)      3.8742 - (0.0001 x Veff)
                                                     [dagger]
--------------------------------------------------------------------------------------------------------------------------------------------------------
* DOE applied the Joint Stakeholder Recommendation for low draw pattern units to the very small draw pattern in its analysis.
** No products exist in the very small draw pattern at the time of this analysis.
[dagger] DOE applied the differences in efficiency levels from the low draw pattern to define the Efficiency Levels 2 and 3 for the very small draw
  pattern.


                                                  Table IV.14--Electric Storage: 55 gal 50,000 Btu/h
----------------------------------------------------------------------------------------------------------------
                                                                                UEF
                Efficiency level                 ---------------------------------------------------------------
                                                   Very small *        Low *          Medium           High
----------------------------------------------------------------------------------------------------------------
0 (Baseline)....................................            0.80            0.81            0.81            0.81
1...............................................   [dagger] 0.86   [dagger] 0.87            0.87            0.89
2 (JSR).........................................   [dagger] 0.89   [dagger] 0.91            0.91            0.93
3...............................................   [dagger] 0.90   [dagger] 0.92            0.92            0.95
4 (Max-Tech)....................................   [dagger] 0.91   [dagger] 0.93            0.93            0.96
----------------------------------------------------------------------------------------------------------------
* Only one brand has commercially-available products in the very small draw pattern and low draw pattern at the
  time of this analysis.
[dagger] DOE applied the differences in efficiency levels from the medium draw pattern to define the Efficiency
  Levels 1 through 4 for the very small draw pattern and the low draw pattern.


[[Page 49094]]

b. Design Options
    Based on its teardown analyses and feedback provided by 
manufacturers in confidential interviews, DOE tentatively determined 
the technology options that are most likely to constitute the pathway 
to achieving the efficiency levels assessed. These technology options 
are referred to as ``design options.'' While manufacturers may achieve 
a given efficiency level using more than one design strategy, the 
selected design options reflect what DOE expects to be the most likely 
approach for the market in general in a standards-case scenario. 
Further details are provided in chapter 5 of the NOPR TSD.
    BWC stated that electric water heaters with 2-inch insulation 
cavities are used mainly for space-constrained installations and water 
heaters with 3-inch insulation cavities would be more representative of 
baseline for non-space-constrained installations. (BWC, No. 32 at p. 2) 
DOE also acknowledges that 3 inches of insulation is more 
representative of baseline electric storage water heaters and has 
therefore updated EL 0 to reflect this.
    BWC indicated that gas-fired storage water heaters can achieve the 
current standards with 1 inch of insulation only if they are designed 
for space-constrained applications, and in this case, the burner is 
downsized, resulting in a lower FHR. BWC stated that EL 0 is commonly 
met with 2 inches of insulation. BWC also noted that some of the 
specified technology options are only used in certain kinds of 
installations with specific constraints. (BWC, No. 32 at p. 2) DOE 
acknowledges that a downsized burner results in a lower FHR, which is 
why burner derating is screened out as a technology option (see section 
IV.B.1 of this document and chapter 4 of the NOPR TSD for details). In 
this NOPR, DOE used the 1-inch insulation design option for baseline 
gas-fired storage water heaters in the low and medium draw patterns. 
For the high draw pattern, where the FHR must be higher, DOE has 
updated the design options for baseline gas-fired storage water heaters 
to reflect the use of 1.5 inches of insulation based on teardown data.
    Table IV.16 through Table IV.20 show the design options at each UEF 
level analyzed for the NOPR.

  Table IV.16--Design Options for Gas-Fired Storage: 20 gal <=Veff <=55
                                   gal
------------------------------------------------------------------------
                       Standard and low NOX       Ultra-low NOX design
        EL                design options                options
------------------------------------------------------------------------
0.................  Standard burner; Standing  Ultra-Low NOX premix
                     pilot; 1'' side/1'' top    burner; Standing pilot;
                     insulation *; Cat I        1'' side/1'' top
                     venting (atmospheric);     insulation *; Cat I
                     Straight flue.             venting (atmospheric);
                                                Straight flue.
1.................  2'' side/2'' top           2'' side/2'' top
                     insulation.                insulation.
2A................  Cat I venting (gas-        Cat I venting (gas-
                     actuated flue damper).     actuated flue damper).
2B................  Electronic ignition; Cat   Electronic ignition; Cat
                     I venting (electric flue   I venting (electric flue
                     damper).                   damper).
3.................  Electronic ignition Cat    Electronic ignition Cat
                     III venting (power         III venting (power
                     venting) Increased heat    venting) Increased heat
                     exchanger baffling.        exchanger baffling.
4.................  Cat IV venting (power      Cat IV venting (power
                     venting) Condensing        venting) Condensing
                     helical flue.              helical flue.
5.................  Increased heat exchanger   Increased heat exchanger
                     surface area.              surface area.
------------------------------------------------------------------------
* 1.5'' side/1.5'' top insulation was used for the high draw pattern.


     Table IV.17--Design Options for Oil-Fired Storage: Veff >50 gal
------------------------------------------------------------------------
          EL                             Design options
------------------------------------------------------------------------
0....................  Single flue heat exchanger; Foam Insulation--1''
                        side/1.5'' top insulation.
1....................  Foam Insulation--2'' side/2.5'' top insulation.
2....................  Multi-flue heat exchanger.
------------------------------------------------------------------------


  Table IV.18--Design Options for Small Electric Storage: 20 gal <=Veff
                          <=35 gal, FHR <51 gal
------------------------------------------------------------------------
          EL                             Design options
------------------------------------------------------------------------
0....................  3'' side/3'' top insulation; Lowboy aspect ratio
                        (less than 36 inches in height).
1....................  Split-system R134A rotary compressor; Capillary
                        expansion device; Counterflow condenser design;
                        Tube-and-fin evaporator design; SPM evaporator
                        fan; 2'' side/2'' top insulation.
------------------------------------------------------------------------


  Table IV.19--Design Options for Electric Storage: 20 gal <=Veff <=55
                  gal, Excluding Small Electric Storage
------------------------------------------------------------------------
          EL                             Design options
------------------------------------------------------------------------
0....................  3'' side/3'' top insulation; Short aspect ratio
                        for products <=35 gal or in the low draw
                        pattern, tall aspect ratio for products >35 gal
                        and in the medium or high draw patterns.
1....................  Integrated R134A rotary compressor; Capillary
                        expansion device; Hotwall condenser; Tube-and-
                        fin evaporator design; SPM evaporator fan; 2''
                        side/2'' top insulation.
2....................  Electronic expansion valve; Larger condenser;
                        Larger evaporator; ECM evaporator fan.
3....................  Larger condenser; Larger evaporator; Insulated
                        sealed system; High efficiency fan blades.
------------------------------------------------------------------------


  Table IV.20--Design Options for Electric Storage: 55 gal <=Veff <=120
                                   gal
------------------------------------------------------------------------
          EL                             Design options
------------------------------------------------------------------------
0....................  Integrated R134A rotary compressor; Electronic
                        expansion valve; Hotwall condenser design; Tube-
                        and-fin evaporator design; SPM evaporator fan;
                        2'' side/2'' top insulation.

[[Page 49095]]

 
1....................  Larger evaporator.
2....................  Higher efficiency compressor; Larger condenser;
                        Larger evaporator; ECM evaporator fan.
3....................  Higher efficiency compressor; Larger condenser;
                        Larger evaporator; High efficiency fan blades.
------------------------------------------------------------------------


  Table IV.21--Design Options for Gas-Fired Instantaneous: Veff <2 gal,
                        Rated Input >50,000 Btu/h
------------------------------------------------------------------------
          EL                             Design options
------------------------------------------------------------------------
0....................  Step modulating burner; Non-condensing tube-and-
                        fin heat exchanger.
1....................  Condensing tube heat exchanger.
2....................  Larger condensing heat exchanger.
3....................  Fully modulating burner; Larger condensing heat
                        exchanger.
4....................  Larger condensing heat exchanger.
------------------------------------------------------------------------

c. Cost Analysis
    The cost analysis portion of the engineering analysis is conducted 
using one or a combination of cost approaches. The selection of cost 
approach depends on a suite of factors, including the availability and 
reliability of public information, characteristics of the regulated 
product, the availability and timeliness of purchasing the product on 
the market. The cost approaches are summarized as follows:
     Physical teardowns: Under this approach, DOE physically 
dismantles a commercially available product, component-by-component, to 
develop a detailed bill of materials for the product.
     Catalog teardowns: In lieu of physically deconstructing a 
product, DOE identifies each component using parts diagrams (available 
from manufacturer websites or appliance repair websites, for example) 
to develop the bill of materials for the product.
     Price surveys: If neither a physical nor catalog teardown 
is feasible (for example, for tightly integrated products such as 
fluorescent lamps, which are infeasible to disassemble and for which 
parts diagrams are unavailable) or cost-prohibitive and otherwise 
impractical (e.g., large commercial boilers), DOE conducts price 
surveys using publicly available pricing data published on major online 
retailer websites and/or by soliciting prices from distributors and 
other commercial channels.
    In this proposed rulemaking, DOE utilizes a combination of the 
physical and catalog teardown approaches to develop estimates of the 
MPC at each UEF efficiency level analyzed. Data from the teardowns were 
used to create bills of materials (``BOMs'') that capture all of the 
materials, components, and manufacturing processes necessary to 
manufacture products that achieve each UEF level. DOE used the BOMs 
along with publicly available material and component cost data as the 
basis for estimating the MPCs. DOE refined its cost estimates and its 
material and component cost data based on feedback received during 
confidential manufacturer interviews.
    DOE received several comments in response to the cost analysis 
presented in the March 2022 Preliminary Analysis.
    BWC expressed concern that DOE's analysis does not reflect this 
costs, which are very different from costs 2 years ago. BWC added that 
DOE's analysis also fails to account for future costs and prices. (BWC, 
No. 32 at p. 3) BWC also commented that some material costs stated in 
the preliminary TSD were inaccurate compared to both current costs and 
BWC's estimates of 5-year average costs and requested a confidential 
interview to provide detailed feedback. (BWC, No. 32 at p. 3) Rheem 
suggested that gas-fired storage water heater MPCs are underestimated, 
especially for condensing options. Rheem also suggested that MPCs 
associated with implementation of heat pump technology across the 
electric storage product class will be significant and are not fully 
reflected in DOE's estimates and requested a confidential interview 
with DOE consultants to provide feedback. (Rheem, No. 45 at pp. 4, 5)
    DOE notes that its consultants routinely conduct confidential 
manufacturer interviews to gather feedback on various analytical 
inputs, which are then aggregated for use in the analysis. In 
preparation for this NOPR, DOE's consultants conducted such interviews 
with manufacturers in which DOE requested and received feedback on the 
MPCs as estimated in the March 2022 Preliminary Analysis, as well as on 
the underlying component and material costs. DOE has updated its cost 
analyses where appropriate, based on this feedback. In addition, due to 
the volatility of metal prices, DOE uses 5-year average metal prices to 
minimize the impact of large fluctuations in metal prices. DOE's 5-year 
average metal cost data have been updated to reflect prices for the 
most recent 5-year period ending September 2022. For all other material 
and component prices, DOE used the most recent prices available at the 
time of the analysis (i.e., September 2022). DOE notes that there have 
been significant increases in material and component prices in 
comparison to those observed in September 2021, which were the basis of 
the MPCs estimated in the March 2022 Preliminary Analysis. As a result, 
the MPCs presented in this NOPR are higher, consistent with the 
feedback provided by commenters.
d. Shipping Costs
    Shipping costs for storage-type consumer water heater product 
classes were determined based on the area of floor space occupied by 
the unit, including packaging. Instantaneous-type consumer water 
heaters have far less storage volume and have shipping costs based on 
weight limitations rather than space occupied. Most consumer water 
heaters cannot be shipped in any orientation other than vertical and 
are too tall to be double-stacked in a vertical fashion, though some 
units analyzed by DOE can be double stacked. For those units that can 
be double-stacked, including gas-fired instantaneous water heaters, 
lowboy electric storage water heaters, and non-lowboy electric storage 
water heaters less than or equal to 35 gallons in storage volume, the 
floor area available effectively doubles, reducing the overall shipping 
cost compared to taller products. DOE also accounted for electric 
storage water heaters sold as split-system heat pumps stacking the heat 
pump assembly atop the tank assembly. DOE research suggests that 
consumer water heaters are usually shipped together in nearly fully 
loaded trailers, rather than in less than

[[Page 49096]]

truckload (``LTL'') configurations, where the consumer water heaters 
only occupy a portion of the trailer volume. Therefore, shipping costs 
have been calculated assuming fully loaded trailers; however, DOE 
applied an assumption that each truckload would only consist of one 
type of water heater, which may result in a conservative estimate of 
shipping costs.
    To calculate the shipping costs, DOE estimated the cost per trailer 
based on standard trailer sizes, shipping the products between the 
middle of the country to the coast, using 2022 as the reference year 
for prices. Next, DOE estimated the shipped size (including packaging) 
of products in each product class at each efficiency level and, for 
each product class and efficiency level, determined the number of units 
that would fit in a trailer. DOE then calculated the average shipping 
cost per unit by dividing the cost per trailer load by the number of 
units that would fit per trailer (either by space limitation for 
storage-type water heaters or by weight limitation for instantaneous-
type water heaters), for each product class and efficiency level.
    DOE requests comment on the analysis assumptions used to estimate 
shipping costs for consumer water heaters.
e. Cost-Efficiency Results
    The results of the engineering analysis are reported as cost-
efficiency data in the form of MPCs and shipping costs calculated for 
each efficiency level of each product class for which DOE is proposing 
amended UEF-based standards. As discussed previously in section IV.C.3 
of this NOPR, DOE determined these costs by developing BOMs based on a 
combination of physical and catalog teardowns and using information in 
the BOMs along with component and material price data to estimate MPCs. 
The results of DOE's analysis are listed in Table IV.22 through Table 
IV.29; see chapter 5 of the NOPR TSD for more details concerning these 
results.
    DOE requests comment on the cost-efficiency results in this 
engineering analysis.

  Table IV.22--Engineering Analysis Results for Gas-Fired Storage: 20 gal <=Veff <=55 gal, Standard and Low NOX
----------------------------------------------------------------------------------------------------------------
                                           UEF
                  ----------------------------------------------------
        EL                                    Medium 38                     MPC (2022$)        Shipping (2022$)
                    Very small   Low 29 gal      gal      High 48 gal
----------------------------------------------------------------------------------------------------------------
0................          N/A         0.54         0.58         0.63  Low: 175.45, Med:     Low: 29.64, Med:
                                                                        203.24, High:         32.81, High:
                                                                        236.63.               49.00.
1................          N/A         0.57         0.60         0.64  Low: 196.56, Med:     Low: 32.81, Med:
                                                                        226.18, High:         35.34, High:
                                                                        249.17.               51.04.
2A...............          N/A         0.59         0.64         0.68  Low: 250.46, Med:     Low: 32.81, Med:
                                                                        280.09, High:         35.34, High:
                                                                        303.08.               51.04.
2B...............          N/A         0.59         0.64         0.68  Low: 282.20, Med:     Low: 32.81, Med:
                                                                        311.57, High:         35.34, High:
                                                                        334.26.               51.04.
3................          N/A         0.60         0.65         0.69  Low: 292.63, Med:     Low: 32.81, Med:
                                                                        322.71, High:         35.34, High:
                                                                        347.45.               51.04.
4................          N/A         0.71         0.75         0.80  Low: 405.24, Med:     Low: 32.81, Med:
                                                                        434.10, High:         35.34, High:
                                                                        464.66.               51.04.
5................          N/A         0.77         0.81         0.88  Low: 421.93, Med:     Low: 35.34, Med:
                                                                        456.34, High:         51.04, High:
                                                                        492.47.               55.68.
----------------------------------------------------------------------------------------------------------------


     Table IV.23--Engineering Analysis Results for Gas-Fired Storage: 20 gal <=Veff <=55 gal, Ultra Low NOX
----------------------------------------------------------------------------------------------------------------
                                           UEF
                  ----------------------------------------------------
        EL                                    Medium 38                     MPC (2022$)        Shipping (2022$)
                    Very small   Low 29 gal      gal      High 48 gal
----------------------------------------------------------------------------------------------------------------
0................          N/A         0.54         0.58         0.63  Low: 257.65, Med:     Low: 29.64, Med:
                                                                        290.09, High:         32.81, High:
                                                                        329.11.               49.00.
1................          N/A         0.57         0.60         0.64  Low: 279.31, Med:     Low: 32.81, Med:
                                                                        313.57, High:         35.34, High:
                                                                        341.91.               51.04.
2A...............          N/A         0.59         0.64         0.68  Low: 333.21, Med:     Low: 32.81, Med:
                                                                        367.47, High:         35.34, High:
                                                                        395.81.               51.04.
2B...............          N/A         0.59         0.64         0.68  Low: 364.95, Med:     Low: 32.81, Med:
                                                                        399.04, High:         35.34, High:
                                                                        427.07.               51.04.
3................          N/A         0.60         0.65         0.69  Low: 379.31, Med:     Low: 32.81, Med:
                                                                        414.41, High:         35.34, High:
                                                                        444.31.               51.04.
4................          N/A         0.71         0.75         0.80  Low: 495.30, Med:     Low: 32.81, Med:
                                                                        527.85, High:         35.34, High:
                                                                        562.68.               51.04.
5................          N/A         0.77         0.81         0.88  Low: 512.00, Med:     Low: 35.34, Med:
                                                                        550.08, High:         51.04, High:
                                                                        590.49.               55.68.
----------------------------------------------------------------------------------------------------------------


                 Table IV.24--Engineering Analysis Results for Oil-Fired Storage: Veff <=50 gal
----------------------------------------------------------------------------------------------------------------
                                                      UEF
             EL              ----------------------------------------------------   MPC (2022$)      Shipping
                               Very small      Low         Medium    High 30 gal                      (2022$)
----------------------------------------------------------------------------------------------------------------
0...........................          N/A          N/A          N/A         0.64          932.84           35.34

[[Page 49097]]

 
1...........................          N/A          N/A          N/A         0.66          964.62           51.04
2...........................          N/A          N/A          N/A         0.68         1054.22           51.04
----------------------------------------------------------------------------------------------------------------


    Table IV.25--Engineering Analysis Results for Small Electric Storage: 20 gal <=Veff <=35 gal, FHR <51 gal
----------------------------------------------------------------------------------------------------------------
                                        UEF
          EL          --------------------------------------- MPC (2022$) Draw Pattern   Shipping, (2022$) Draw
                        Very small   Low 26 gal   Low 35 gal           (Veff)                Pattern (Veff)
----------------------------------------------------------------------------------------------------------------
0....................          N/A         0.92         0.91  Low (26): 161.74, Low     Low (26): 18.56, Low
                                                               (35): 183.73.             (35): 29.17.
1....................          N/A         2.00         2.00  Low (26): 500.60, Low     Low (26): 55.68, Low
                                                               (35): 518.84.             (35): 58.34.
----------------------------------------------------------------------------------------------------------------


Table IV.26--Engineering Analysis Results for Electric Storage: 20 gal <=Veff <=55 gal, Excluding Small Electric
                                                     Storage
----------------------------------------------------------------------------------------------------------------
                                            UEF
               ------------------------------------------------------------  MPC (2022$) Draw   Shipping (2022$)
      EL          Very     Low 36    Medium    Medium    Medium    High 55    Pattern (Veff)      Draw Pattern
                  small      gal     30 gal    36 gal    45 gal      gal                             (Veff)
----------------------------------------------------------------------------------------------------------------
0.............       N/A      0.91      0.92      0.92      0.92      0.93  Low (36): 184.99,  Low (36): 49.00,
                                                                             Med (30):          Med (30): 25.52,
                                                                             171.49, Med        Med (36): 34.04,
                                                                             (36): 189.77,      Med (45): 35.34,
                                                                             Med (45):          High (55):
                                                                             205.75, High       53.26.
                                                                             (55): 221.86.
1.............       N/A      2.30      2.30      2.30      2.30      2.30  Low (36): 397.67,  Low (36): 49.00,
                                                                             Med (30):          Med (30): 51.04,
                                                                             276.12, Med        Med (36): 34.03,
                                                                             (36): 400.31,      Med (45): 35.34,
                                                                             Med (45):          High (55):
                                                                             416.25, High       53.26.
                                                                             (55): 425.70.
2.............       N/A      3.29      3.35      3.35      3.35      3.47  Low (36): 419.64,  Low (36): 49.00,
                                                                             Med (30):          Med (30): 51.04,
                                                                             406.39, Med        Med (36): 34.03,
                                                                             (36): 422.26,      Med (45): 35.34,
                                                                             Med (45):          High (55):
                                                                             438.79, High       53.26.
                                                                             (55): 456.64.
3.............       N/A      3.69      3.75      3.75      3.75      3.87  Low (36): 482.54,  Low (36): 49.00,
                                                                             Med (30):          Med (30): 51.04,
                                                                             471.60, Med        Med (36): 34.03,
                                                                             (36): 486.16,      Med (45): 35.34,
                                                                             Med (45):          High (55):
                                                                             504.95, High       53.26.
                                                                             (55): 510.83.
----------------------------------------------------------------------------------------------------------------


             Table IV.28--Engineering Analysis Results for Electric Storage: 55 gal 50,000 Btu/h
----------------------------------------------------------------------------------------------------------------
                                            UEF
               ------------------------------------------------------------
      EL                                   Medium 120,000    High 199,000      MPC (2022$)      Shipping (2022$)
                 Very small      Low           Btu/h            Btu/h
----------------------------------------------------------------------------------------------------------------
0.............          N/A          N/A             0.81             0.81  Med: 253.68,       Med: 6.93, High:
                                                                             High: 276.61.      11.70.
1.............          N/A          N/A             0.87             0.89  Med: 374.33,       Med: 10.83, High:
                                                                             High: 394.00.      14.54.
2.............          N/A          N/A             0.91             0.93  Med: 380.81,       Med: 15.60, High:
                                                                             High: 402.38.      17.55.
3.............          N/A          N/A             0.92             0.95  Med: 390.21,       Med: 16.60, High:
                                                                             High: 410.00.      17.55.
4.............          N/A          N/A             0.93             0.96  Med: 396.07,       Med: 15.60, High:
                                                                             High: 423.26.      17.55.
----------------------------------------------------------------------------------------------------------------


[[Page 49098]]

2. Product Classes Without Current UEF-Based Standards
    In the December 2016 Conversion Factor Final Rule, DOE established 
that EF-based standards as established by EPCA are applicable to 
consumer water heaters but would not be enforced until conversion 
factors and converted standards are adopted. 81 FR 96204, 96209-96211. 
To convert these EF-based standards to UEF-based standards, DOE first 
developed conversion factors that convert tested values measured under 
the DOE test procedure in effect prior to the July 2014 TP Final Rule 
(which produces the EF metric) to values found under the current DOE 
test procedure (which produces the UEF metric). DOE then applied these 
conversion factors to representative baseline models and derived the 
UEF-based energy conservation standards from the resulting UEF values.
    Circulating water heaters are covered by the existing standards for 
instantaneous water heaters; however these standards have not been 
enforced for circulating water heaters because of differences in how 
circulating water heaters operate resulting in difficulty determining 
UEF ratings under the previously applicable test procedure. Prior to 
the publication of the June 2023 TP Final Rule, the test procedure did 
not provide sufficient clarity regarding how these products should be 
tested, and the June 2023 TP Final Rule established a new method of 
testing circulating water heaters with separate storage tanks (see 
section 4.10 of appendix E) to represent how these products are used in 
the field. As a result of this method of testing, the efficiency 
ratings for circulating water heaters will reflect the standby losses 
incurred by the separate storage tank. In order to determine applicable 
UEF-based standards for circulating water heaters based on use of the 
newly established test procedure, DOE used the existing UEF-based 
standards for gas-fired instantaneous water heaters and electric 
instantaneous water heaters at 10 CFR 430.32(d) as the starting point 
for gas-fired circulating water heaters and electric circulating water 
heaters. DOE used the converted UEF-based standards for oil-fired 
instantaneous water heaters as the starting point for oil-fired 
circulating water heaters. As discussed previously in section III.C of 
this document, the effective storage volume of a circulating water 
heater is equal to the measured storage volume of the separate storage 
tank used for testing, so to account for these standby losses, DOE is 
proposing that the standards decrease linearly as a function of this 
effective storage volume. According to section 4.10 of appendix E, gas-
fired circulating water heaters, oil-fired circulating water heaters, 
and electric resistance circulating water heaters (which would be 
considered the baseline type of electric circulating water heaters) are 
to be tested with unfired hot water storage tanks (``UFHWSTs'') with 
measured volumes between 80 and 120 gallons. DOE has tentatively 
determined that the relationship between standby losses and storage 
volume is similar for electric storage water heaters above 55 gallons 
and for UFHWSTs. Thus, DOE adjusted the UEF-based standards for 
instantaneous water heaters by applying the linear decreases in the 
currently applicable standards for electric storage water heaters 
greater than 55 gallons in rated storage volume to result in the 
converted standards for circulating water heaters. See chapter 5 of the 
NOPR TSD for further details describing this analysis.
    DOE requests comment on the analytical approach used to determine 
equivalent baseline standards for circulating water heaters.
    The proposed UEF-based standards that were translated from EF-based 
standards and the updated UEF standards for circulating water heaters 
that reflect the new test procedure are listed below in Table IV.30. 
See chapter 5 of the NOPR TSD for more detail concerning how UEF-based 
standards were determined.

               Table IV.30--Translated UEF-Based Energy Conservation Standards for Product Classes Without Established UEF-Based Standards
--------------------------------------------------------------------------------------------------------------------------------------------------------
             Product class                    Nominal input         Effective storage volume            Draw pattern             Uniform energy factor
--------------------------------------------------------------------------------------------------------------------------------------------------------
Gas-fired Storage Water Heater........  <=75,000 Btu/h..........  <20 gal....................  Very Small...................     0.2062-(0.0020 x Veff)
                                                                                               Low..........................     0.4893-(0.0027 x Veff)
                                                                                               Medium.......................     0.5758-(0.0023 x Veff)
                                                                                               High.........................     0.6586-(0.0020 x Veff)
                                                                  >100 gal...................  Very Small...................     0.1482-(0.0007 x Veff)
                                                                                               Low..........................     0.4342-(0.0017 x Veff)
                                                                                               Medium.......................     0.5596-(0.0020 x Veff)
                                                                                               High.........................     0.6658-(0.0019 x Veff)
Oil-fired Storage Water Heater........  <=105,000 Btu/h.........  >50 gal....................  Very Small...................     0.1580-(0.0009 x Veff)
                                                                                               Low..........................     0.4390-(0.0020 x Veff)
                                                                                               Medium.......................     0.5389-(0.0021 x Veff)
                                                                                               High.........................     0.6172-(0.0018 x Veff)
Electric Storage Water Heaters........  <=12 kW.................  <20 gal....................  Very Small...................     0.5925-(0.0059 x Veff)
                                                                                               Low..........................     0.8642-(0.0030 x Veff)
                                                                                               Medium.......................     0.9096-(0.0020 x Veff)
                                                                                               High.........................     0.9430-(0.0012 x Veff)
                                                                  >120 gal...................  Very Small...................     0.3574-(0.0012 x Veff)
                                                                                               Low..........................     0.7897-(0.0019 x Veff)
                                                                                               Medium.......................     0.8884-(0.0017 x Veff)
                                                                                               High.........................     0.9575-(0.0013 x Veff)
Tabletop Water Heater.................  <=12 kW.................  <20 gal....................  Very Small...................     0.5925-(0.0059 x Veff)
                                                                                               Low..........................     0.8642-(0.0030 x Veff)
Instantaneous Gas-fired Water Heater..  <=50,000 Btu/h..........  <2 gal.....................  Very Small...................                       0.64
                                                                                               Low..........................                       0.64
                                                                                               Medium.......................                       0.64
                                                                                               High.........................                       0.64
                                        <=200,000 Btu/h.........  >=2 gal....................  Very Small...................     0.2534-(0.0018 x Veff)
                                                                                               Low..........................     0.5226-(0.0022 x Veff)

[[Page 49099]]

 
                                                                                               Medium.......................     0.5919-(0.0020 x Veff)
                                                                                               High.........................     0.6540-(0.0017 x Veff)
Instantaneous Oil-fired Water Heater..  <=210,000 Btu/h.........  <2 gal.....................  Very Small...................                       0.61
                                                                                               Low..........................                       0.61
                                                                                               Medium.......................                       0.61
                                                                                               High.........................                       0.61
                                                                  >=2 gal....................  Very Small...................     0.2780-(0.0022 x Veff)
                                                                                               Low..........................     0.5151-(0.0023 x Veff)
                                                                                               Medium.......................     0.5687-(0.0021 x Veff)
                                                                                               High.........................     0.6147-(0.0017 x Veff)
Instantaneous Electric Water Heater...  <=12 kW.................  >=2 gal....................  Very Small...................     0.8086-(0.0050 x Veff)
                                                                                               Low..........................     0.9123-(0.0020 x Veff)
                                                                                               Medium.......................     0.9252-(0.0015 x Veff)
                                                                                               High.........................     0.9350-(0.0011 x Veff)
Gas-fired Circulating Water Heater....  <=200,000 Btu/h.........  All........................  Very Small...................     0.8000-(0.0011 x Veff)
                                                                                               Low..........................     0.8100-(0.0011 x Veff)
                                                                                               Medium.......................     0.8100-(0.0011 x Veff)
                                                                                               High.........................     0.8100-(0.0011 x Veff)
Oil-fired Circulating Water Heater....  <=210,000 Btu/h.........  All........................  Very Small...................     0.6100-(0.0011 x Veff)
                                                                                               Low..........................     0.6100-(0.0011 x Veff)
                                                                                               Medium.......................     0.6100-(0.0011 x Veff)
                                                                                               High.........................     0.6100-(0.0011 x Veff)
Electric Circulating Water Heater.....  <=12 kW; for heat pump    All........................  Very Small...................     0.9100-(0.0011 x Veff)
                                         type units <=24 A at                                  Low..........................     0.9100-(0.0011 x Veff)
                                         <=250 V.                                              Medium.......................     0.9100-(0.0011 x Veff)
                                                                                               High.........................     0.9200-(0.0011 x Veff)
--------------------------------------------------------------------------------------------------------------------------------------------------------

    BWC requested clarification on DOE's methods to convert EF 
standards to UEF standards without an applicable test procedure to 
verify that the EF-based standards are appropriate in the first place. 
(BWC, No. 32 at p. 3) Rheem recommended that technologies used at the 
baseline for product classes with UEF-based standards also be used for 
the new volume and input rate ranges being covered. (Rheem, No. 45 at 
p. 9) BWC also suggested that increasing standards for electric storage 
water heaters with a volume of less than 20 gallons could preclude many 
existing models from the market, which BWC added serve a unique utility 
for very space-constrained installations. (BWC, No. 32 at p. 4)
    The Department's detailed methodology for performing the conversion 
factor analysis on these product classes was provided in chapter 5 of 
the preliminary TSD and is also described in chapter 5 of the NOPR TSD. 
In summary, DOE used the conversion parameters from the December 2016 
Conversion Factor Final Rule which corresponded to the product types 
most closely related to the product classes in question. DOE began with 
the EF-based standards equations prescribed at 42 U.S.C. 6295(e)(1) as 
a representation of the distribution of baseline-efficiency models in 
each product class. Considering all of the combinations of rated 
storage volumes and input rates which could yield baseline-efficiency 
models in each product class, DOE converted the EF rating to an 
estimated UEF rating. Once the UEF was determined for every model in 
this hypothetical population of all possible baseline EF models, DOE 
determined the most stringent UEF versus rated storage volume 
relationship (i.e., the smallest-magnitude slope) that would allow the 
entire population to pass. These relationships were presented in Table 
5.15.6 of the preliminary TSD. In this NOPR, DOE additionally assumed 
that the effective storage volume of each model would be equal to its 
rated storage volume. Thus, DOE replaced the rated storage volume term 
in these equations with effective storage volume for the proposed 
standards for these product classes.
    In response to Rheem's suggestion, DOE was unable to clearly 
determine whether the baseline technologies used in product classes 
with UEF-based standards also apply to the most similar product classes 
with EF-based standards, especially in light of BWC's comment 
indicating that these products may be designed differently for unique 
applications. Additionally, because the storage volumes and input rates 
of the product classes with EF-based standards are different from the 
storage volumes and input rates of the product classes with UEF-based 
standards, DOE expects that manufacturers may implement different 
baseline technologies for models that do not have current UEF-based 
standards. As discussed in section II.B of this document, the current 
UEF-based standards are the result of two cycles of rulemakings that 
increased the stringency of the original statutory standards and also 
the December 2016 Conversion Factor Final Rule (converting the more-
stringent EF-based standards into UEF-based standards). For example, in 
this NOPR, DOE estimates that electric storage water heaters between 20 
and 55 gallons might typically use 3 inches of polyurethane foam in 
order to meet the current UEF standards; however, it is not clear 
whether this much insulation is being used for much smaller electric 
storage water heaters--such as those with only 2 gallons of rated 
storage volume. In some cases, such as oil-fired instantaneous water 
heaters, there are no current UEF-based standards from which to 
ascertain any baseline technologies.
    In section 5.15 of chapter 5 of the preliminary TSD, DOE discussed 
that it performed testing of 19 water heater models covering a variety 
of classes and characteristics to confirm that the UEF energy 
conservation standards would be achievable by the consumer water 
heaters available on the market. In

[[Page 49100]]

response, AHRI, BWC, and Rheem requested a list of the models tested 
when determining UEF-based standards for products that do not currently 
have them. (AHRI, No. 42 at p. 5; BWC, No. 32 at p. 3; Rheem, No. 45 at 
p. 9) To clarify, DOE's testing was limited to models available on the 
market that fell within these product classes. DOE was able to obtain 
and perform UEF testing on: 17 electric storage water heaters ranging 
from 1.8 gallons to 19.9 gallons of rated storage volume (with the 
average rated storage volume in the sample being approximately 8.7 
gallons), 1 electric storage water heater with 158 gallons of rated 
storage volume, and 1 oil-fired instantaneous water heater with 5.3 
gallons of rated storage volume.
    Rheem supported DOE establishing realistic UEF-based standards for 
consumer water heaters currently without them as long as installation 
flexibility is maintained, but noted its concern that the establishment 
of these new standards could increase manufacturer burden. (Rheem, No. 
45 at p. 9) In response, DOE reiterates that the stringency of these 
standards is not increasing as a result of the conversion, and 
therefore, manufacturers should not need to redesign their products to 
meet the UEF-based standards, if adopted.
    DOE seeks comment from interested parties regarding the 
appropriateness of the converted UEF-based standards presented in Table 
IV.30 and whether products on the market can meet or exceed the 
proposed levels. If products are found to generally exceed the proposed 
levels, the Department requests information and data on the UEF of 
products within these product classes.
3. Manufacturer Selling Price
    To account for manufacturers' non-production costs and profit 
margin, DOE applies a multiplier (the manufacturer markup) to the MPC. 
The resulting manufacturer selling price (``MSP'') is the price at 
which the manufacturer distributes a unit into commerce. DOE developed 
an average manufacturer markup by examining the annual Securities and 
Exchange Commission (``SEC'') 10-K reports filed by publicly traded 
manufacturers that produce consumer water heaters, the manufacturer 
markups from the April 2010 Final Rule, and feedback from confidential 
manufacturer interviews. 75 FR 20112. See chapter 12 of the NOPR TSD 
for additional detail on the manufacturer markup.

D. Markups Analysis

    The markups analysis develops appropriate markups (e.g., retailer 
markups, distributor markups, contractor markups) in the distribution 
chain and sales taxes to convert the MSP estimates derived in the 
engineering analysis to consumer prices, which are then used in the LCC 
and PBP analysis and in the manufacturer impact analysis. At each step 
in the distribution channel, companies mark up the price of the product 
to cover business costs and profit margin.
    For consumer water heaters, the main parties in the distribution 
chain are: (1) manufacturers, (2) wholesalers or distributors, (3) 
retailers, (4) plumbing contractors, (5) builders, (6) manufactured 
home manufacturers, and (7) manufactured home dealers/retailers. See 
chapter 6 and appendix 6A of the NOPR TSD for a more detailed 
discussion about parties in the distribution chain.
    For this NOPR, DOE characterized how consumer water heater products 
pass from the manufacturer to residential and commercial consumers \33\ 
by gathering data from several sources, including consultant report 
(available in appendix 6A of the NOPR TSD), 2022 BRG report,\34\ and 
2020 Clear Seas Research Water Heater contractor survey \35\ to 
determine the distribution channels and fraction of shipments going 
through each distribution channel. The distribution channels for 
replacement or new owner of consumer water heaters in residential 
applications (not including mobile homes) are characterized as follows: 
\36\
---------------------------------------------------------------------------

    \33\ DOE estimates that 2 percent of gas-fired storage heaters 
(GSWHs), 25 percent of oil-fired storage water heaters (OSWHs), 11 
percent of electric storage water heaters (ESWHs), and 9 percent of 
gas-fired instantaneous water heaters (GIWHs) will be shipped to 
commercial applications in 2030.
    \34\ BRG Building Solutions, The North American Heating & 
Cooling Product Markets (2022 Edition) (Available at: 
www.brgbuildingsolutions.com/reports-insights) (Last accessed May 1, 
2023).
    \35\ Clear Seas Research, 2020 Mechanical System--Water Heater 
(Available at: https://clearseasresearch.com/reports/industries/mechanical-systems/) (Last accessed May 1, 2023).
    \36\ Based on available data, DOE assumed that the consumer 
water heater goes through the: wholesaler/contractor 50 percent of 
the time for GSWHs, 90 percent of the time for OSWHs, 45 percent of 
the time for ESWHs, and 55 percent of the time for GIWHs; directly 
form the retailer 45 percent of the time for GSWHs, 5 percent of the 
time for OSWHs, 50 percent of the time for ESWHs, and 40 percent of 
the time for GIWHs, and retailer/contractor 5 percent of the time 
for GSWHs, OSWHs, ESWHs, and GIWHs.

Manufacturer [rarr] Wholesaler [rarr] Plumbing Contractor [rarr] 
Consumer
Manufacturer [rarr] Retailer [rarr] Consumer
Manufacturer [rarr] Retailer [rarr] Plumbing Contractor [rarr] Consumer

    For mobile home replacement or new owner applications, there is one 
additional distribution channel where manufacturers sell to mobile home 
dealer/retail outlet that then sells to the customer.\37\
---------------------------------------------------------------------------

    \37\ Based on available data, DOE assumed that the consumer 
water heater in mobile homes goes through the: wholesaler/contractor 
5 percent of the time for GSWHs, 90 percent of the time for OSWHs, 5 
percent of the time for ESWHs, and 55 percent of the time for GIWHs; 
directly form the retailer 10 percent of the time for GSWHs, 5 
percent of the time for OSWHs, 25 percent of the time for ESWHs, and 
40 percent of the time for GIWHs; retailer/contractor 5 percent of 
the time for GSWHs, OSWHs, ESWHs, and GIWHs; and directly through 
mobile home retailer 80 percent of the time for GSWHs, 0 percent of 
the time for OSWHs, 65 percent of the time for ESWHs, and 0 percent 
of the time for GIWHs.
---------------------------------------------------------------------------

    Mainly for consumer water heaters in commercial applications, DOE 
considers an additional distribution channel for which the manufacturer 
sells the equipment to the wholesaler and then to the consumer through 
a national account in both replacement and new construction markets.
    The new construction distribution channel includes an additional 
link in the chain--the builder. The distribution channels for consumer 
water heaters in new construction \38\ in residential applications (not 
including mobile homes) are characterized as follows: \39\
---------------------------------------------------------------------------

    \38\ DOE estimates that 10 percent of gas-fired storage heaters 
(GSWHs), 2 percent of oil-fired storage water heaters (OSWHs), 14 
percent of electric storage water heaters (ESWHs), and 32 percent of 
gas-fired instantaneous water heaters (GIWHs) will be shipped to new 
construction applications in 2030.
    \39\ DOE believes that many builders are large enough to have a 
master plumber and not hire a separate contractor, and assigned 
about half of water heater shipments to new construction to this 
channel. DOE estimated that in the new construction market, 90 
percent of the residential (not including mobile homes) and 80 
percent in commercial applications goes through a wholesalers to 
builders channel and the rest go through national account 
distribution channel.

Manufacturer [rarr] Wholesaler [rarr] Plumbing Contractor [rarr] 
Builder [rarr] Consumer
Manufacturer [rarr] Wholesaler [rarr] Builder [rarr] Consumer
Manufacturer [rarr] Wholesaler (National Account) [rarr] Consumer

    For new construction, all mobile home GSWHs and ESWHs are sold as 
part of mobile homes in a specific distribution chain characterized as 
follows:

Manufacturer [rarr] Mobile Home Manufacturer [rarr] Mobile Home Dealer 
[rarr] Consumer

    DOE developed baseline and incremental markups for each actor in 
the distribution chain. Baseline

[[Page 49101]]

markups are applied to the price of products with baseline efficiency, 
while incremental markups are applied to the difference in price 
between baseline and higher-efficiency models (the incremental cost 
increase). The incremental markup is typically less than the baseline 
markup and is designed to maintain similar per-unit operating profit 
before and after new or amended standards.\40\
---------------------------------------------------------------------------

    \40\ Because the projected price of standards-compliant products 
is typically higher than the price of baseline products, using the 
same markup for the incremental cost and the baseline cost would 
result in higher per-unit operating profit. While such an outcome is 
possible, DOE maintains that, in markets that are reasonably 
competitive, it is unlikely that standards would lead to a 
sustainable increase in profitability in the long run.
---------------------------------------------------------------------------

    PHCC stated that they do not believe that the mark-ups and 
incremental mark-ups of water heaters are similar to consumer 
electronics or real estate. PHCC believes that mark-ups may be trimmed 
in competitive bidding situations, but in the typical replacement 
market, consumers generally take the price of the serviceman who is 
ready to restore their hot water. Regarding the TSD references to the 
construction industry not being more profitable now than it has been 
for decades, PHCC added that this may be true in percentage terms, but 
as costs have gone up, the real profits have increased. (PHCC, No.40 at 
p. 2) In contrast, CA IOUs stated that DOE's analysis regarding the 
incremental cost associated with ELs for electric storage water heaters 
is consistent with their understanding of the typical markup practices. 
(CA IOUs, No. 39, p. 2)
    The concept of DOE's incremental markup approach is based on a 
simple notion that an increase in profitability, which is implied by 
keeping a fixed markup when the product price goes up, is not likely to 
be viable over time in a business that is reasonably competitive. DOE 
discusses the consumer electronics and real estate industries as 
examples of this notion. DOE's analysis necessarily considers a 
simplified version of the world of water heater manufacturers and 
contractors: namely, a situation in which nothing changes except for 
those changes in water heater offerings that occur in response to 
amended standards.
    DOE recognizes that manufacturers and contractors are likely to 
seek to maintain the same markup on water heaters if the price they pay 
goes up as a result of appliance standards, but it believes that over 
time adjustment is likely to occur due to competitive pressures. Other 
manufacturers and contractors may find that they can gain sales by 
reducing the markup and maintaining the same per-unit operating profit. 
Additionally, DOE contends that pricing is more complicated than a 
simple fixed profit margin.
    DOE acknowledges that its approach to estimating manufacturer and 
contractor markup practices after amended standards take effect is an 
approximation of real-world practices that are both complex and varying 
with business conditions. However, DOE continues to maintain that its 
assumption that standards do not facilitate a sustainable increase in 
profitability is reasonable. See chapter 6 and appendix 6B of the NOPR 
TSD for more details about DOE's baseline and incremental markup 
approach.
    To estimate average baseline and incremental markups, DOE relied on 
several sources, including: (1) form 10-K from U.S. Securities and 
Exchange Commission (``SEC'') for Home Depot, Lowe's, Wal-Mart, and 
Costco (for retailers); (2) U.S. Census Bureau 2017 Annual Retail Trade 
Report for miscellaneous store retailers (NAICS 453) (for online 
retailers),\41\ (3) U.S. Census Bureau 2017 Economic Census data \42\ 
on the residential and commercial building construction industry (for 
builder, plumbing contractor, mobile home manufacturer, mobile home 
retailer/dealer); and (4) the U.S. Census Bureau 2017 Annual Wholesale 
Trade Report data \43\ (for wholesalers). DOE assumes that the markups 
for national account is half of the value of wholesaler markups. In 
addition, DOE used the 2005 Air Conditioning Contractors of America's 
(``ACCA'') Financial Analysis on the Heating, Ventilation, Air-
Conditioning, and Refrigeration (``HVACR'') contracting industry \44\ 
to disaggregate the mechanical contractor markups into replacement and 
new construction markets for consumer water heaters used in commercial 
applications.
---------------------------------------------------------------------------

    \41\ U.S. Census Bureau, 2017 Annual Retail Trade Report, 
available at www.census.gov/programs-surveys/arts.html (last 
accessed May 1, 2023). Note that the 2017 Annual Retail Trade Report 
is the latest version of the report that includes detailed operating 
expenses data.
    \42\ U.S. Census Bureau, 2017 Economic Census Data. available at 
www.census.gov/programs-surveys/economic-census.html (last accessed 
May 1, 2023). Note that the 2017 Economic Census Data is the latest 
version of this data.
    \43\ U.S. Census Bureau, 2017 Annual Wholesale Trade Report. 
available at www.census.gov/wholesale/index.html (last accessed May 
1, 2023). Note that the 2017 AWTR Census Data is the latest version 
of this data.
    \44\ Air Conditioning Contractors of America (``ACCA''), 
Financial Analysis for the HVACR Contracting Industry (2005), 
available at www.acca.org/store#/storefront (last accessed May 1, 
2023). Note that the 2005 Financial Analysis for the HVACR 
Contracting Industry is the latest version of the report and is only 
used to disaggregate the mechanical contractor markups into 
replacement and new construction markets.
---------------------------------------------------------------------------

    In addition to the mark-ups, DOE obtained State and local taxes 
from data provided by the Sales Tax Clearinghouse.\45\ These data 
represent weighted average taxes that include county and city rates. 
DOE derived shipment-weighted average tax values for each state 
considered in the analysis.
---------------------------------------------------------------------------

    \45\ Sales Tax Clearinghouse Inc., State Sales Tax Rates Along 
with Combined Average City and County Rates (January 8, 2023) 
(Available at: www.thestc.com/STrates.stm) (Last accessed May 1, 
2023).
---------------------------------------------------------------------------

    Chapter 6 of the NOPR TSD provides details on DOE's development of 
markups for consumer water heaters.
    DOE seeks comments about DOE's approach for distribution channels 
and markup values.

E. Energy Use Analysis

    The purpose of the energy use analysis is to determine the annual 
energy consumption of consumer water heaters at different efficiencies 
in representative U.S. single-family homes, mobile homes, multi-family 
residences, and commercial buildings, and to assess the energy savings 
potential of increased consumer water heaters efficiency. The energy 
use analysis estimates the range of energy use of consumer water 
heaters in the field (i.e., as they are actually used by consumers). 
The energy use analysis provides the basis for other analyses DOE 
performed, particularly assessments of the energy savings and the 
savings in consumer operating costs that could result from adoption of 
amended or new standards.
    DOE estimated the annual energy consumption of consumer water 
heaters at specific energy efficiency levels across a range of climate 
zones, building characteristics, and water heating applications. The 
annual energy consumption includes the natural gas, liquid petroleum 
gas (``LPG''), and electricity used by the consumer water heater.
    Chapter 7 of the NOPR TSD provides details on DOE's energy use 
analysis for consumer water heaters.
1. Building Sample
    To determine the field energy use of consumer water heaters used in 
homes, DOE established a sample of households using consumer water 
heaters from EIA's 2015 Residential Energy Consumption Survey (``RECS 
2015''), which is the most recent such survey that is currently fully 
available.\46\ The

[[Page 49102]]

RECS data provide information on the vintage of the home, as well as 
water heating energy use in each household. DOE used the household 
samples not only to determine water heater annual energy consumption, 
but also as the basis for conducting the LCC and PBP analyses. DOE 
projected household weights and household characteristics in 2030, the 
first year of compliance with any amended or new energy conservation 
standards for consumer water heaters. To characterize future new homes, 
DOE used a subset of homes in RECS 2015 that were built after 2000.
---------------------------------------------------------------------------

    \46\ Energy Information Administration (``EIA''), 2015 
Residential Energy Consumption Survey (``RECS'') (Available at: 
www.eia.gov/consumption/residential/) (Last accessed May 1, 2023).
---------------------------------------------------------------------------

    To determine the field energy use of consumer water heaters used in 
commercial buildings, DOE established a sample of buildings using 
consumer water heaters from EIA's 2018 Commercial Building Energy 
Consumption Survey (``CBECS 2018''), which is the most recent such 
survey that is currently fully available.\47\ See appendix 7A of the 
NOPR TSD for details about the CBECS 2018 sample.
---------------------------------------------------------------------------

    \47\ U.S. Department of Energy: Energy Information 
Administration, Commercial Buildings Energy Consumption Survey 
(2018) (Available at: www.eia.gov/consumption/commercial/data/2018/index.php?view=microdata) (Last accessed May 1, 2023).
---------------------------------------------------------------------------

    AHRI, Rheem, and GE Appliances are concerned with the Department 
using outdated data for the energy use analysis. They stated that it is 
not a valid assumption that the market has remained unchanged since 
2012 or 2015. In the public meeting on April 12, 2022, the Department 
stated that they will be updating their analysis to use the CBECS 2018 
data. AHRI, Rheem, and GE Appliances urged the Department to update its 
analysis to use the 2020 RECS data as soon as it becomes available. In 
addition, they recommended that DOE conduct updated surveys, studies, 
and analysis where the existing data sources are out of date, some by 
as much as ten years. (AHRI, No. 42 at p. 4; GEA, No. 46 at p. 1; 
Rheem, No. 45 at p. 8) In addition, NYSERDA also recommends the use of 
most current RECS 2020 to better reflect today's conditions and use the 
most recent data available to understand these dynamics due to the 
lasting impacts from COVID-19 pandemic on consumer water heater usage 
including the shift in the hours spent outside the home. They also 
stated that more people in a household leads to more hot water demand, 
and eventually more efficient energy use. (NYSERDA, No. 35 at pp. 4-5)
    For this NOPR, DOE used the most recent data that was available. 
While conducting the analysis, RECS 2020 was not fully available and 
did not have energy consumption estimates. DOE did update the sample 
weighting based on RECS 2020 data. To confirm sample weighting using 
RECS 2020, DOE also reviewed trends from multiple sources including 
RECS, CBECS, Home Innovations data, American Home Comfort Survey data, 
and American Housing Survey (AHS) to determine any changes in occupant 
density and types of home, changes in the housing stock by region, new 
construction trends, and changes in the types of water heater used by 
region and market segment. DOE also compared its energy use model 
results to multiple studies including NEEA data, RASS data, Pecan 
Street data, and multiple other water heater studies. DOE has found 
that its energy use analysis results are similar to these studies. DOE 
agrees with NYSERDA that as the number of individuals living in 
households increases, the typically increases hot water use, but DOE 
has currently no evidence that individuals living in households is 
increasing over time. Also, DOE is currently tracking potential long-
term impacts of COVID-19 pandemic on residential hot water use, but 
notes that it appears that a significant fraction of the increased hot 
water use seen during the COVID-19 pandemic has started to reverse as 
more people return to the workplace. See chapter 7, appendix 7A and 
appendix 7B of the NOPR TSD for more details about the building sample 
and distribution of hot water energy use including results comparison.
    NEEA, ACEEE, and NWPCC requested that DOE ignore households that 
use no water in the analysis. They stated that for households with no 
hot water use, the cost-effectiveness of owning any water heater is, at 
best, undefined or zero and accordingly, calculating the cost-
effectiveness of incrementally increasing the efficiency of a water 
heater with no water use is undefined. (NEEA, ACEEE, and NWPCC, No. 47 
at p. 8) The LCC analysis accounts for occupied homes and buildings 
using RECS and CBECS. All these homes and buildings in the LCC analysis 
have at least some hot water use, so no households have zero hot water 
use.
2. Consumer Water Heater Sizing and Draw Pattern
    Calculating hot water use for each sample household requires 
assigning the water heater a specific tank size (referred to as rated 
volume). For each household, RECS reports one of three water heater 
tank sizes (small, medium, or large), as well as the size range in 
gallons. ``Typical'' water heater sizes, which are those most common 
for each fuel type, have the minimum energy factor allowed by current 
energy conservation standards. These ``typical'' storage tank units 
have the largest market share in their product class (50 gallon for 
electric, 40 gallon for natural gas and LPG, and 30 gallon for oil). 
The sizes are referred to as ``standard'' sizes. In addition, DOE 
accounted for different draw patterns in the test procedure (i.e., low, 
medium, and high).
    In order to disaggregate the selected sampled water heaters into 
standard sizes and draw patterns, DOE used a variety of sources 
including RECS historical data on reported tank sizes, input from an 
expert consultant, and model data from DOE's public Certification 
Compliance Management System (``CCMS'') \48\ and AHRI certification 
directory \49\ together with other publicly available data from 
manufacturers' catalogs of consumer water heaters. For gas-fired 
instantaneous water heaters, DOE also used a combination of 
confidential data provide by AHRI from 2004-2007.\50\ For all product 
classes, disaggregated shipments data by rated volume from BRG Building 
Solutions 2022 report from 2007 to 2021 \51\ and disaggregated based on 
data from U.S. Census Bureau data (2003-2008).\52\ Finally to determine 
the best product type and size for different applications, DOE used 
manufacturer-produced consumer water heater sizing guidelines and 
calculators.
---------------------------------------------------------------------------

    \48\ U.S. Department of Energy-Appliance & Equipment Standards 
Program. Compliance Certification Management System (CCMS) for 
Consumer Water Heaters (Downloaded June 1, 2022). (Available at 
www.regulations.doe.gov/certification-data/CCMS-4-Water_Heaters.html#q=Product_Group_s%3A%22Water%20Heaters%22) (Last 
accessed May 1, 2023).
    \49\ Air Conditioning Heating and Refrigeration Institute. 
Consumer's Directory of Certified Efficiency Ratings for Heating and 
Water Heating Equipment. June 1, 2022. (Available at 
www.ahridirectory.org) (Last accessed May 1, 2023).
    \50\ AHRI. Confidential Instantaneous Gas-fired Water Heater 
Shipments Data from 2004-2007 to LBNL. March 3, 2008.
    \51\ BRG Building Solutions. The North American Heating & 
Cooling Product Markets (2022 Edition). 2022.
    \52\ U.S. Census Bureau. Current Industrial Reports for Major 
Household Appliances 2003-2008. Washington, DC Report No. MA335F.
---------------------------------------------------------------------------

    BWC stated that the amount of manufacturer models on public 
databases used in the analysis does not accurately reflect market 
shares of particular sizes or groups of models. They stated that 
multiple models with the same or very similar characteristics are 
likely attributed to manufacturers

[[Page 49103]]

that have multiple brand names serving different parts of the market or 
particular customers. (BWC, No. 32 at p. 5). DOE's unique set of 
consumer water heater models removes models that have the same 
characteristics and represent multiple brands. DOE's use of this model 
dataset is only used when shipment or market data is not available. 
When the model data is used, consultant input or other available 
sources are used to try to better reflect the market shares of consumer 
water heaters at different sizes and characteristics. See appendix 7D 
of the NOPR TSD for more details about the model database.
    NEEA, ACEEE, and NWPCC noted that RECS 2015 data shows that many 
homes have storage water heaters that are likely oversized for the 
needs of their occupants. NEEA, ACEEE, and NWPCC stated that DOE should 
consider that such homes may either choose to downsize equipment when 
replacing a water heater if it is oversized or choose to purchase an 
oversized water heater in anticipation of a home sale to new owners 
with greater hot water needs. (NEEA, ACEEE, and NWPCC, No. 47 at p. 9) 
DOE agrees that consumers could downsize equipment when replacing a 
water heater if it is oversized or choose to purchase an oversized 
water heater in anticipation of a home sale to new owners with greater 
hot water needs. There is limited historical data to quantify 
historical trends in the number of cases in the no-new-standards case 
where households might select a smaller or larger water heater, so DOE 
kept its equipment sizing methodology for the no-new-standards case. 
For the NOPR analysis, DOE did estimate that due to higher efficiency 
standards a fraction of consumers could downsize equipment when 
replacing a water heater if it is oversized to deal with space 
constraint installation issues or to downsize to smaller water heater 
options not impacted by standards (such as below 35 gallons for ESWHs 
in the proposed efficiency level).
    NEEA, ACEEE, and NWPCC recommended that DOE should consider 
turnover in occupancy that may result in different draw profiles 
throughout the life of a given water heater. (NEEA, ACEEE, and NWPCC, 
No. 47 at p. 9) DOE agrees that several factors (such as turnover in 
occupancy and changes in consumer preference over time) may result in 
changes in the draw profiles and hot water use throughout the life of a 
given water heater. Currently, DOE could not find any data to quantify 
historical trends in draw patterns (such as shifts in the average 
occupancy per water heater). Therefore, DOE contends that on the 
overall hot water use averages out over the entire sample, since while 
some households could increase their hot water use analysis, on average 
a proportional number of households will decrease their hot water use. 
Therefore, DOE continued to assign the same draw profiles and hot water 
use throughout the life of a given water heater in the building sample, 
since on average energy use results would remain the same.
    See appendix 7B of the NOPR TSD for more information about DOE's 
sizing methodology and comparison to available historical data.
3. Consumer Water Heater Energy Use Determination
    To calculate the energy use of consumer water heaters, DOE 
determined the energy consumption associated with water heating and any 
auxiliary electrical use. In addition, for heat pump water heaters, DOE 
also accounted for the indirect effects of heat pump water heaters on 
heating, cooling, and dehumidification systems to compensate for the 
effects of the heat pump operation.\53\ DOE calculated the energy use 
of water heaters using a simplified energy equation, the water heater 
analysis model (``WHAM''). WHAM accounts for a range of operating 
conditions and energy efficiency characteristics of water heaters. 
Water heater operating conditions are indicated by the daily hot water 
draw volume, inlet water temperature, thermostat setting, and air 
temperature around the water heater (ambient air temperature). To 
describe energy efficiency characteristics of water heaters, WHAM uses 
three parameters that also are used in the DOE test procedure: recovery 
efficiency (RE), standby heat-loss coefficient (UA), and rated input 
power (PON).
---------------------------------------------------------------------------

    \53\ If the heat pump water heater is installed in a conditioned 
space and is un-ducted, the cooling byproduct of the heat pump 
operation could produce a cooling effect that could increase space 
heating energy use in the heating season and decrease space cooling 
energy use in the cooling season. In addition, heat pump operation 
could also produce a dehumidifying effect that could reduce 
dehumidifier equipment energy use.
---------------------------------------------------------------------------

    The current version of WHAM is appropriate for calculating the 
energy use of electric resistance storage water heaters. To account for 
the characteristics of other types of water heaters, energy use must be 
calculated using modified versions of the WHAM equation. These modified 
versions are further discussed in chapter 7 and appendix 7B of the NOPR 
TSD.
    The daily hot water draw volume is estimated based on the water 
heater energy use estimated from RECS 2015 and CBECS 2018. The inlet 
water temperature is based on weather station temperature data and RECS 
2015 ground water temperature data for each household. The consumer 
water heater thermostat setting is based on multiple sources including 
contractor survey data and field data. To estimate the air temperature 
around the water heater (ambient air temperature), DOE assigned the 
sampled water heaters a water heater installation location including 
indoors (in the living space, such as an indoor closet), basement, 
garages, crawlspaces, outdoor closets, attics, etc. (see appendix 7B of 
this NOPR TSD for the installation fractions for consumer water heaters 
by installation location). These fractions vary significantly by region 
and type of home, which matches available survey data. Once the water 
heater is assigned an installation location, DOE then uses a 
methodology to determine the surrounding water heater ambient 
temperature. For example, in indoor locations the temperatures are 
assumed to be equal to the thermostat temperature. Other locations such 
as unconditioned attics or unconditioned basements/crawlspaces, outdoor 
closets, garages could have temperatures that are either lower than 32 
deg. or above 100 deg. for a fraction of the year. See appendix 7B and 
8D (installation costs) of the NOPR TSD for more details about the 
installation location methodology and ambient temperature methodology.
    ONE Gas and Gas Association Commenters generally supported energy 
use analysis that is tied to the UEF energy descriptor. Given that DOE 
and stakeholders went to great lengths to develop and justify the UEF 
metric upon consumer use assumptions, the resulting consensus behind 
UEF should serve as the basis for energy use analysis. (One Gas, No. 
44, p. 12; Gas Association Commenters, No. 41, Attachment E at p. 15) 
As explained above, DOE's energy use analysis is based on UEF energy 
descriptor and test procedure derived parameters (RE, UE, 
Pon). DOE then converts this data to field energy use using 
modified WHAM equations (see appendix 7B of this NOPR TSD for more 
details).
4. Heat Pump Water Heater Energy Use Determination
    For heat pump water heaters, energy efficiency and consumption are 
dependent on ambient temperature. To account for this factor, DOE 
expanded the WHAM to include a heat pump performance adjustment factor. 
The equation for determining the energy consumption of heat pump water

[[Page 49104]]

heaters is similar to the WHAM equation, but a performance adjustment 
factor that is a function of the average ambient temperature is applied 
to adjust RE. A heat pump water heater operates either in heat pump or 
in electric resistance mode. DOE estimated that the electric resistance 
mode of operation is used 100 percent of the time when the monthly 
ambient temperature is less than 32 [deg]F or more than 100 [deg]F. A 
heat pump water heater also operates in the electric resistance mode 
for part of the time even when the monthly ambient temperature (where 
the equipment is installed) is between 32 [deg]F and 100 [deg]F, 
because this product has a slower recovery rate than an electric 
resistance water heater. DOE determined that, depending on household 
hot water consumption patterns, the electric resistance mode of 
operation varies significantly from household to household (on average 
DOE estimated that electric resistance mode accounts for 10 percent of 
the heat pump water heater unit's operating time).
    NRECA stated that the benefits of using electric hybrid heat pump 
water heaters in colder climates are significantly less. NRECA stated 
that the energy savings and costs should be considered region by 
region, and not averaged nationally, as the impact to individual 
consumers may vary significantly. (NRECA, No. 33 at p. 3) DOE's energy 
use model is conducted for a representative sample of households that 
matches different conditions around the country where the electric 
water heater is installed as indicated by the RECS and CBECS data. 
Therefore, the impacts of heat pump water heaters vary for individual 
consumers. Appendix 7B of the NOPR TSD presents the energy use results 
for different regions to highlight this aspect of the analysis.
    PHCC stated that page 7B-4 of the preliminary analysis TSD has a 
discussion of heat pump water heaters not operating when ambient 
temperatures are below 32 [deg]F or above 100 [deg]F and it was unclear 
what this means. PHCC stated that the TSD infers that the majority of 
these products will be installed indoors, which would not be in those 
extreme temperature ranges. (PHCC, No. 40 at p. 2) As previously 
explained, electric storage water heaters are typically installed in 
indoors (in the living space, such as an indoor closet), basement, 
garages, crawlspaces, outdoor closets, attics, etc. The installation 
location fractions vary significantly by region and type of home. Once 
the water heater is assigned an installation location, DOE then 
determines the surrounding water heater ambient temperature based on 
several factors. For example, in indoor locations the temperatures are 
assumed to be equal to the thermostat temperature. Other locations such 
as unconditioned attics or unconditioned basements/crawlspaces, outdoor 
closets, garages could have temperatures that are either lower than 32 
[deg]F or above 100 [deg]F for a fraction of the year. For more details 
on the estimate of water heater ambient temperature, see chapter 7 and 
appendix 7B of the NOPR TSD.
    PHCC stated that DOE's analysis assumes that heat pump water 
heaters will operate as resistance electric units 10 percent of the 
time. PHCC believed that given the meager recovery rate typical of heat 
pump water heaters and their poor performance with cold water below 50 
[deg]F, it would seem logical that these products would rely on 
resistance heat for much more time (30 or perhaps 40 percent of the 
time). (PHCC, No. 40 at p. 2) DOE notes that the 10 percent value is a 
national average, which is based on several studies. This value varies 
significantly by time of year, ambient temperature around water heater, 
water temperature, installation location and characteristics, hot water 
usage patterns, etc. For consumer water heaters installed in a location 
with lower cold water temperatures and lower ambient temperatures, the 
electric resistance use is closer to 30 percent of the time. For more 
details see appendix 7B of the NOPR TSD.
    Rheem stated that Table 7.4.1 in the preliminary TSD shows that ELs 
3 and 4 for electric storage water heaters >=20 and <=55 gallons show 
an increase in fossil-fuel use. Rheem requested clarification on why an 
electric water heater has fossil-fuel use and why this use is not seen 
in the >55 to <=120-gallon range. (Rheem, No. 45 at p. 8) During the 
winter months, heat pump storage water heaters could impact the space 
heating load by cooling the surrounding space. Depending on the 
location of the water heater, this could lead to greater use of the 
space heating system, which leads to increased fossil fuel energy use 
for homes that use fossil fuel as the primary space heating source. In 
the case of >55 gallon sizes, the difference between the baseline and 
higher efficiency is very small because both are heat pumps. For this 
NOPR, DOE included the impact for >55 gallon sizes, which shows on 
average a decrease in cooling impact for higher efficiency HPWHs, due 
to their fewer compressor operating hours.
    NEEA, ACEEE, and NWPCC stated that DOE is likely overestimating the 
increased space heating system use (and decreased cooling use) due to 
the impact of heat pump water heater operation in conditioned space. 
NEEA, ACEEE, and NWPCC pointed out that considerable research by NEEA 
and others shows that not all the heat extracted from the air (by the 
heat pump) is subsequently replaced by the space heating system (or 
counts as an offset to the cooling system) and that, on average, only 
65 percent of the heat extracted from the air by the HPWH is replaced 
by the space heating system. NEEA, ACEEE, and NWPCC provided several 
references in support of this phenomena. (NEEA, ACEEE, and NWPCC, No. 
47 at p. 9) For the preliminary analysis, DOE estimated that two-thirds 
of heat extracted from the air by the HPWH is replaced by the space 
conditioning system. DOE reviewed its analysis methodology and 
assumptions based on the references provided. Based on this data, DOE 
was able to confirm the estimate.

F. Life-Cycle Cost and Payback Period Analysis

    DOE conducted LCC and PBP analyses to evaluate the economic impacts 
on individual consumers of potential energy conservation standards for 
consumer water heaters. The effect of new or amended energy 
conservation standards on individual consumers usually involves a 
reduction in operating cost and an increase in purchase cost. DOE used 
the following two metrics to measure consumer impacts:
    [squ] The LCC is the total consumer expense of an appliance or 
product over the life of that product, consisting of total installed 
cost (manufacturer selling price, distribution chain markups, sales 
tax, and installation costs) plus operating costs (expenses for energy 
use, maintenance, and repair). To compute the operating costs, DOE 
discounts future operating costs to the time of purchase and sums them 
over the lifetime of the product.
    [squ] The PBP is the estimated amount of time (in years) it takes 
consumers to recover the increased purchase cost (including 
installation) of a more-efficient product through lower operating 
costs. DOE calculates the PBP by dividing the change in purchase cost 
at higher efficiency levels by the change in annual operating cost for 
the year that amended or new standards are assumed to take effect.
    For any given efficiency level, DOE measures the change in LCC 
relative to the LCC in the no-new-standards case, which reflects the 
estimated efficiency distribution of consumer water heaters in the 
absence of new or amended energy conservation standards. In

[[Page 49105]]

contrast, the PBP for a given efficiency level is measured relative to 
the baseline product.
    For each considered efficiency level in each product class, DOE 
calculated the LCC and PBP for a nationally representative set of 
housing units and commercial buildings. As stated previously, DOE 
developed household and commercial building samples from RECS 2015 and 
CBECS 2018. For each sample household and commercial building, DOE 
determined the energy consumption for the consumer water heaters and 
the appropriate energy price. By developing a representative sample of 
households and commercial buildings, the analysis captured the 
variability in energy consumption and energy prices associated with the 
use of consumer water heaters.
    Inputs to the calculation of total installed cost include the cost 
of the product--which includes MPCs, manufacturer markups, retailer and 
distributor markups, and sales taxes--and installation costs. Inputs to 
the calculation of operating expenses include annual energy 
consumption, energy prices and price projections, repair and 
maintenance costs, product lifetimes, and discount rates. DOE created 
distributions of values for product lifetime, discount rates, and sales 
taxes, with probabilities attached to each value, to account for their 
uncertainty and variability.
    BWC was concerned about numerous references that are outdated 
surveys and other data sources of which some sources are 17 years old. 
BWC stated that today's costs to consumers and manufacturers are 
significantly beyond what they were a few years ago, which can give the 
impression that certain Efficiency Levels can be justified. BWC 
strongly recommended DOE contract surveys or studies on their own to 
obtain the information necessary to properly inform their major 
regulatory policy decisions. (BWC, No. 32 at p. 5) DOE always tries to 
use the most up-to-date data. For this analysis, DOE reviewed all its 
references and updated them to the latest available as highlighted 
throughout this NOPR document and the associated TSD. DOE also hired a 
contractor to supplement and/or validate its review for today's costs 
and market conditions.
    The computer model DOE uses to calculate the LCC relies on a Monte 
Carlo simulation to incorporate uncertainty and variability into the 
analysis. The Monte Carlo simulations randomly sample input values from 
the probability distributions and consumer water heaters user samples. 
For this rulemaking, the Monte Carlo approach is implemented in MS 
Excel together with the Crystal Ball\TM\ add-on.\54\ The model 
calculated the LCC for products at each efficiency level for 10,000 
water heater installations in housing and commercial building units per 
simulation run. The analytical results include a distribution of 10,000 
data points showing the range of LCC savings for a given efficiency 
level relative to the no-new-standards case efficiency distribution. In 
performing an iteration of the Monte Carlo simulation for a given 
consumer, product efficiency is chosen based on its probability. If the 
chosen product efficiency is greater than or equal to the efficiency of 
the standard level under consideration, the LCC calculation reveals 
that a consumer is not impacted by the standard level. By accounting 
for consumers who already purchase more-efficient products, DOE avoids 
overstating the potential benefits from increasing product efficiency.
---------------------------------------------------------------------------

    \54\ Crystal Ball\TM\ is commercially-available software tool to 
facilitate the creation of these types of models by generating 
probability distributions and summarizing results within Excel, 
available at www.oracle.com/technetwork/middleware/crystalball/overview/index.html (last accessed May 1, 2023).
---------------------------------------------------------------------------

    DOE calculated the LCC and PBP for consumers of consumer water 
heaters as if each were to purchase a new product in the expected first 
full year of required compliance with new or amended standards. Amended 
standards would apply to consumer water heaters manufactured 5 years 
after the date on which any new or amended standard is published. (42 
U.S.C. 6295(g)(10)(B)) At this time, DOE estimates issuance of a final 
rule in 2024. Therefore, for purposes of its analysis, DOE used 2030 as 
the first full year of compliance with any amended standards for 
consumer water heaters.
    NEEA, ACEEE, and NWPCC requested that DOE publish the LCC of HPWHs 
binned by occupancy and average daily water draw. NEEA, ACEEE, and 
NWPCC stated that DOE's draw profiles derived from RECS 2015 exhibit a 
wide variance in water consumption even among homes with the same 
occupancy resulting in net cost for households with very low water 
usage and the proposed approach will allow for a better assessment. 
(NEEA, ACEEE, and NWPCC, No. 47 at p. 8) DOE provides additional LCC 
results binned by occupancy and average daily water draw in appendix 
8G.
    Table IV. summarizes the approach and data DOE used to derive 
inputs to the LCC and PBP calculations. The paragraphs that follow 
provide further discussion. Details of the spreadsheet model, and of 
all the inputs to the LCC and PBP analyses, are contained in chapter 8 
of the NOPR TSD and its appendices.

                    Table IV.31--Summary of Inputs and Methods for the LCC and PBP Analysis *
----------------------------------------------------------------------------------------------------------------
                         Inputs                                                Source/method
----------------------------------------------------------------------------------------------------------------
Product Cost............................................  Derived by multiplying MPCs by manufacturer and
                                                           retailer markups and sales tax, as appropriate. Used
                                                           historical data to derive a price scaling index to
                                                           project product costs.
Installation Costs......................................  Baseline installation cost determined with data from
                                                           RSMeans. Assumed no change with efficiency level.
Annual Energy Use.......................................  Total annual energy use based on the average daily hot
                                                           water use, derived from the building samples.
                                                          Variability: Based on the RECS 2015 and CBECS 2018.
Energy Prices...........................................  Natural Gas: Based on EIA's Natural Gas Navigator data
                                                           for 2022.
                                                          Electricity: Based on EIA's Form 861 data for 2022.
                                                          Propane and Fuel Oil: Based on EIA's State Energy Data
                                                           System (``SEDS'') for 2021.
                                                          Variability: Regional energy prices determined for 50
                                                           states and District of Columbia for residential and
                                                           commercial applications.
                                                          Marginal prices used for natural gas, propane, and
                                                           electricity prices.
Energy Price Trends.....................................  Based on AEO2023 price projections.
Repair and Maintenance Costs............................  Based on RSMeans 2023 data and other sources. Assumed
                                                           variation in cost by efficiency.
Product Lifetime........................................  Based on shipments data, multi-year RECS, American
                                                           Housing Survey, American Home Comfort Survey data.

[[Page 49106]]

 
Discount Rates..........................................  Residential: approach involves identifying all
                                                           possible debt or asset classes that might be used to
                                                           purchase the considered appliances, or might be
                                                           affected indirectly. Primary data source was the
                                                           Federal Reserve Board's Survey of Consumer Finances.
                                                          Commercial: Calculated as the weighted average cost of
                                                           capital for businesses purchasing NWGFs. Primary data
                                                           source was Damodaran Online.
Compliance Date.........................................  2030.
----------------------------------------------------------------------------------------------------------------
* Not used for PBP calculation. References for the data sources mentioned in this table are provided in the
  sections following the table or in chapter 8 of the NOPR TSD.

1. Product Cost
    To calculate consumer product costs, DOE multiplied the MPCs 
developed in the engineering analysis by the markups described 
previously (along with sales taxes). DOE used different markups for 
baseline products and higher-efficiency products, because DOE applies 
an incremental markup to the increase in MSP associated with higher-
efficiency products.
    PHCC review of just one nationally noted online plumbing wholesale 
source found that the cost of various types of water heaters to be near 
or even exceed the TSD projected installed cost of water heaters. 
(PHCC, No. 40 at p. 1) DOE updated its MPC values from the engineering 
analysis and the markups to the latest available values. Overall the 
water heater retail prices increased. DOE compared its estimated retail 
prices to available current retail prices and found that the prices are 
comparable to DOE's estimates (see Appendix 6A of this NOPR TSD).
    BWC requested DOE elaborate on how it has arrived at its 
installation cost estimates for EL 2, which included thermopile flue 
dampers as an associated design option, considering that thermopile 
flue dampers are not commercially available for the consumer water 
heater market. (BWC, No. 32 at p. 2) In response, as previously 
discussed in the screening analysis section, IV.B.1, of this NOPR, DOE 
has removed this design option from all proposed efficiency levels and 
updated cost estimates.
    Examination of historical price data for certain appliances and 
equipment that have been subject to energy conservation standards 
indicates that the assumption of constant real prices may, in many 
cases, overestimate long-term trends in appliance and equipment prices. 
Economic literature and historical data suggest that the real costs of 
these products may in fact trend downward over time according to 
``learning'' or ``experience'' curves.\55\
---------------------------------------------------------------------------

    \55\ Desroches, L.-B., K. Garbesi, C. Kantner, R. Van Buskirk, 
and H.-C. Yang. Incorporating Experience Curves in Appliance 
Standards Analysis. Energy Policy. 2013. 52 pp. 402-416; Weiss, M., 
M. Junginger, M. K. Patel, and K. Blok. A Review of Experience Curve 
Analyses for Energy Demand Technologies. Technological Forecasting 
and Social Change. 2010. 77(3): pp. 411-428.
---------------------------------------------------------------------------

    In the experience curve method, the real cost of production is 
related to the cumulative production or ``experience'' with a 
manufactured product. This experience is usually measured in terms of 
cumulative production. As experience (production) accumulates, the cost 
of producing the next unit decreases. The percentage reduction in cost 
that occurs with each doubling of cumulative production is known as the 
learning rate. In typical experience curve formulations, the learning 
rate parameter is derived using two historical data series: cumulative 
production and price (or cost). DOE obtained historical PPI data for 
water heating equipment from 1950-1961, 1968-1973, and 1977-2022 for 
electric consumer water heaters and from 1967-1973 and 1977-2022 for 
all other consumer water heaters from the Bureau of Labor Statistics' 
(BLS).\56\ The PPI data reflect nominal prices, adjusted for product 
quality changes. An inflation-adjusted (deflated) price index for 
heating equipment manufacturing was calculated by dividing the PPI 
series by the implicit price deflator for Gross Domestic Product 
Chained Price Index.
---------------------------------------------------------------------------

    \56\ Series ID PCU33522033522081 and PCU33522833522083; see 
www.bls.gov/ppi/.
---------------------------------------------------------------------------

    From 1950 to 2006, the deflated price index for consumer water 
heaters was mostly decreasing, or staying flat. Since then, the index 
has risen, primarily due to rising prices of copper, aluminum, and 
steel products which are the major raw material used in water heating 
equipment. The rising prices for copper and steel products were 
attributed to a series of global events, from strong demand from China 
and other emerging economies to the recent severe delay in commodity 
shipping due to the COVID-19 pandemic. Given the slowdown in global 
economic activity in recent years and the lingering impact from the 
global pandemic, DOE believes that the extent to which the trends of 
the past five years will continue is very uncertain. DOE also assumes 
that any current supply chain constraints are short-lived and will not 
persist to the first year of compliance. Therefore, DOE decided to use 
constant prices as the default price assumption to project future 
consumer water heater prices. Thus, projected prices for the LCC and 
PBP analysis are equal to the 2022 values for each efficiency level in 
each product class. DOE welcomes comment on the use of a constant price 
trend.
    CA IOUs stated that the current difference in pricing between 
electric resistance water heater and HPWHs reflects HPWH's current 
small share of the electric storage water heater market. They believe 
that the potential for future increases in HPWH sales volumes will 
lower prices. CA IOUs encouraged DOE to reflect this potential through 
the inclusion of price learning in its Life Cycle Cost analyses. (CA 
IOUs, No. 39 at p. 2) The MPCs estimated by DOE account for economies 
of scale for HPWHs if they are a standard and the sales volume sales is 
much larger.
    CA IOUs stated that in comparing condensing technologies in 
commercial residential-duty gas and consumer storage water heaters 
analysis, they believe that DOE has significantly underestimated the 
learning price trend for consumer storage water heaters. Because the 
incremental MPC for condensing design options is lower in commercial 
residential duty water analysis compared to consumer water heaters 
analysis, even though they would expect the opposite to be true due to 
commercial residential duty larger size. (CA IOUs, No. 52 at pp. 5-6) 
NYSERDA commented that DOE should adopt price learning for condensing 
technology in its LCC analyses for consumer storage water heaters. 
(NYSERDA, No. 51 at p. 2) NYSERDA also recommends DOE to conduct a 
sensitivity analysis for different technology price scenarios. 
(NYSERDA, No. 35 at p. 3) Joint Advocates encouraged DOE to investigate 
how the analysis could reflect price learning associated with

[[Page 49107]]

heat pump and condensing technology. Joint Advocates expected that the 
price trends associated with heat pump and condensing technologies will 
be significantly different than the overall price trends of water 
heaters. In particular, components used in heat pump water heaters, 
such as compressors and heat exchangers, are similar to those used in 
other air conditioning and heat pump equipment. Joint Advocates noted 
that in the rulemakings for space cooling heat pumps and room air 
conditioners DOE applied price trends similar to central air 
conditioners which utilize similar components. (Joint Advocates, No. 
34, p. 3)
    DOE acknowledges that the prices of higher efficiency technologies 
(such as heat pump or condensing technology options) may not change at 
the same rate and using a trend for all water heaters to represent the 
price trend of higher efficiency water heaters may underestimate the 
future decline in the cost of higher efficiency water heaters. However, 
DOE could not find detailed data that would allow for a price trend 
projection for higher efficiency water heaters that may differ from 
baseline water heaters. Thus, for this NOPR, it used the same price 
trend projection for all water heaters. Although DOE was not able to 
find information or data regarding price trends related to different 
water heater technologies, DOE is aware of alternative approaches to 
estimating learning rates.\57\ For this analysis, DOE included a 
scenario where HPWH and condensing technology had a separate learning 
curve, which is similar to HVAC equipment.
---------------------------------------------------------------------------

    \57\ Taylor, M. and K. S. Fujita, Accounting for Technological 
Change in Regulatory Impact Analyses: The Learning Curve Technique, 
Lawrence Berkeley National Laboratory, Report No. LBNL-6195E (2013) 
(Available at: eta-publications.lbl.gov/sites/default/files/lbnl-6195e_.pdf) (Last accessed May 1, 2023).
---------------------------------------------------------------------------

2. Installation Cost
    The installation cost is the cost to the consumer of installing the 
consumer water heater, in addition to the cost of the water heater 
itself. The cost of installation covers all labor, overhead, and 
material costs associated with the replacement of an existing water 
heater or the installation of a water heater in a new home, as well as 
delivery of the new water heater, removal of the existing water heater, 
and any applicable permit fees. Higher-efficiency water heaters may 
require one to incur additional installation costs.
    DOE's analysis of installation costs estimated specific 
installation costs for each sample household based on building 
characteristics given in RECS 2015 and CBECS 2018. For this NOPR, DOE 
used 2023 RSMeans data for the installation cost estimates, including 
labor costs.58 59 60 61 DOE's analysis of installation costs 
accounted for regional differences in labor costs by aggregating city-
level labor rates from RSMeans into 50 U.S. States and the District of 
Columbia to match RECS 2015 data and CBECS 2018 data.
---------------------------------------------------------------------------

    \58\ RSMeans Company Inc., RSMeans Mechanical Cost Data. 
Kingston, MA (2023) (Available at: www.rsmeans.com/products/books/2022-cost-data-books) (Last accessed May 1, 2023).
    \59\ RSMeans Company Inc., RSMeans Residential Repair & 
Remodeling Cost Data. Kingston, MA (2023) (Available at: 
www.rsmeans.com/products/books/2022-cost-data-books) (Last accessed 
May 1, 2023).
    \60\ RSMeans Company Inc., RSMeans Plumbing Cost Data. Kingston, 
MA (2023) (Available at: www.rsmeans.com/products/books/2022-cost-data-books) (Last accessed May 1, 2023).
    \61\ RSMeans Company Inc., RSMeans Electrical Cost Data. 
Kingston, MA (2023) (Available at: www.rsmeans.com/products/books/2022-cost-data-books) (Last accessed May 1, 2023).
---------------------------------------------------------------------------

a. Basic Installation Costs and Inputs
    First, DOE estimated basic installation costs that are applicable 
to all consumer water heaters, in replacement, new owner, and new home 
or building installations. These costs include putting in place and 
setting up the consumer water heater, gas piping and/or electrical 
hookup, permits, water piping, removal of the existing consumer water 
heater, and removal or disposal fees.
    PHCC stated that the values for products, materials, and labor used 
in the preliminary analysis TSD do not seem to be aligned with the 
current market. PHCC's review of just one nationally noted online 
plumbing wholesale source found that the cost of various types of water 
heaters to be near or even exceed the TSD projected installed cost of 
water heaters. PHCC found that the cost of many of the miscellaneous 
products listed in the TSD analysis are understated as well (expansion 
tanks, water heater stands, relief valves, pipe and fittings, etc.). 
(PHCC, No. 40 at p. 1) DOE updated its MPC values from the engineering 
analysis and the markups to the latest available values. Overall the 
water heater retail prices increased. DOE compared its estimated retail 
prices to available current retail prices and found that the prices are 
comparable to DOE's estimates (see Appendix 6A of this NOPR TSD). DOE 
updated the components cost with data from RS Means 2023 and found them 
comparable to multiple other sources (see Appendix 7D of this NOPR 
TSD).
    BWC states that there are a number of labor and material costs that 
are mischaracterized. (BWC, No. 32 at p.6) BWC did not provide any 
details, so DOE was unable to determine what they believe is 
mischaracterized. However, DOE welcomes specific suggestions as to how 
it might improve its maintenance and repair methodology.
    PHCC observed that the TSD indicates plumbers charge approximately 
$64 per hour for residential work and $89 for commercial work yet the 
analysis uses $60 per hour. PHCC's opinion is that these values are 
very low. Further, PHCC noted that in several instances DOE relies on 
information from sources in the HVAC industry which are not plumbing 
professionals and that there are differences between the two 
industries. (PHCC, No. 40 at p. 2) PHCC also pointed out that there are 
errors and confusing statements in the preliminary analysis TSD 
appendix 8C and requested clarification of these issues. (PHCC, No. 40 
at p. 3) In regard to the plumbers' hourly rates, the consultant report 
uses a $60 per hour average labor hour for illustration purposes based 
on actual rates in a few locations. DOE's analysis uses plumbing labor 
rates based on RS Means data that vary by state and market segment 
(residential or commercial). In addition, DOE assigned a higher labor 
rate for ``emergency'' replacements in residential applications. For 
mobile home installations, DOE also assigned lower labor rates based on 
consultant input on the labor rates that might be used in the mobile 
homes market. For the NOPR analysis, DOE updated labor rates using the 
latest RSMeans 2023 available. DOE also significantly updated its 
installation cost appendix (appendix 8D of the NOPR TSD) to correct 
inconsistencies noted by stakeholders.
    PHCC stated that the materials needed for the installation that DOE 
included seem somewhat random. For example, 3 feet of pipe is allowed 
for hot and cold-water pipe drops, which is fine if the heater is 
located under the mains but there may be a need for branch piping to 
get to a location. In addition, PHCC stated that electrical 
requirements should be included, and there is no mention of seismic 
bracing as required in numerous jurisdictions. (PHCC, No. 40 at p. 4) 
The fixed pipe lengths and materials costs that are listed in the 
consultant report, are for typical installations for illustrative 
purposes. In DOE's analysis, the pipe lengths vary based on a 
distribution of pipe lengths. DOE's analysis also includes a variety of 
installation costs that are encountered in the field to meet different 
electrical

[[Page 49108]]

requirements and code requirements (for example, seismic bracing in all 
California installations). For the NOPR, DOE expanded the material 
requirements for different installation situations (see appendix 8D of 
the NOPR TSD for more details).
    PHCC noted that the installation time of 2.08 hours is low however 
no breakdown for the various installation items is provided. (PHCC, No. 
40 at p. 4) The 2.08 hours refers to the consultant report average 
typical hours to install and set into place a water heater for 
illustrative purposes, while in DOE's analysis this value varies based 
on the installation characteristics. (see appendix 8D of the NOPR TSD).
    PHCC noted that the direct vent installations have lower cost than 
a conventional system due to the vent material, but the installation of 
these units is more complex. (PHCC, No. 40 at p. 4) For the NOPR, DOE 
expanded the distribution of values associated with setting in place a 
water heater in several installation situations including differences 
in installation costs for direct vent compared to conventional system 
venting (see appendix 8D of the NOPR TSD).
    PHCC noted that a trip charge is included for service contractors 
to cover some travel and office overhead related to the job, but the 
water heater installations additionally require some miscellaneous 
materials and some special tooling as well as the costs for vehicles 
and fuel. These additional costs are not recognized as part of the trip 
charge. (PHCC, No. 40 at p. 4) Based on the consultant report, DOE's 
analysis included additional miscellaneous materials as a line item.
    PHCC stated that not all water meters have check valves. For 
systems that have check valves, the water heater expansion tank is 
necessary. The expansion tank should also be replaced at a changeout of 
a water heater, which adds additional installation costs. (PHCC, No. 40 
at p. 4) DOE agrees that not all water heaters have check valves. DOE's 
analysis accounts for replacement of the expansion tank when the water 
heater is replaced. For the preliminary analysis, DOE estimated that 5% 
of water heater installations would require an expansion tank. For the 
NOPR, reviewed available data and the updated consultant report, but 
found no source to justify a lower or higher fraction. DOE also notes 
that the check valve installation cost is the same for baseline and 
higher efficiency equipment.
b. Gas-Fired and Oil-Fired Water Heater Installation Costs
    For gas-fired and oil-fired water heater installations, DOE 
included a number of additional costs (``adders'') for a fraction of 
the sample households. Most of these additional cost adders are 
associated with installing higher efficiency consumer water heater 
designs in replacement installations.
    For replacement installations, DOE conducted a detailed analysis of 
installation costs when a baseline (or minimum efficiency) consumer 
water heater is replaced with higher efficiency design options, with 
particular attention to space constraint issues (associated with larger 
dimensions for certain higher efficiency consumer water heaters), 
venting issues, and condensate withdrawal (for power vented and 
condensing gas-fired water heaters). Due to the larger dimensions of 
higher efficiency storage water heaters, installation adders included 
removing and replacing door jambs (to be able to fit the larger sized 
water heater) or adding tempering valves for increasing set-point 
temperatures to install a smaller sized storage water heater that 
produces the same hot water output. For non-condensing gas-fired and 
oil-fired water heaters, additional costs included updating flue vent 
connectors, vent resizing, and chimney relining. For non-condensing 
power vented and condensing gas-fired water heaters, additional costs 
included adding a new flue vent, combustion air vent for direct vent 
installations, concealing vent pipes for indoor installations, 
addressing an orphaned furnace (by updating flue vent connectors, vent 
resizing, or chimney relining), and condensate removal. Freeze 
protection is accounted for in the cost of condensate removal for a 
fraction of condensing gas-fired water heaters installed in non-
conditioned spaces.
    DOE also included installation adders for new owner and new 
construction installations. For non-condensing gas-fired and oil-fired 
water heaters, a new flue vent and accounting for other commonly vented 
heating appliances are the only adders. For power vented and condensing 
gas-fired water heaters, the adders include new flue vent, combustion 
air vent for direct vent installations, and condensate removal.
    Atmos, One Gas, and Gas Association Commenters stated that DOE 
should more accurately consider the variability and uncertainty around 
installation costs of water heaters, particularly in water heater 
replacement applications requiring a shift in venting systems from 
atmospheric venting to power venting, and the consequences of venting 
to other appliances. (Atmos, No. 38 at p. 3; One Gas, No. 44 at p. 6 ; 
Gas Association Commenters, No. 41, Attachment E at p. 8) PHCC stated 
that in terms of gas venting it has long maintained that the conversion 
to condensing products is not always an acceptable option. PHCC pointed 
out that there are some installations where vent lengths could exceed 
the manufacturer's recommendation. (PHCC, No. 40 at p. 3) CA IOUs 
stated that in comparing condensing technologies in Commercial 
residential-duty gas and consumer storage water heaters analysis, they 
believe that DOE has significantly overestimated the installation for 
consumer storage water heaters. Because the incremental installation 
cost for condensing design options is lower in commercial residential 
duty water analysis compared to consumer water heaters analysis, even 
though they would expect the opposite to be true due to commercial 
residential duty larger size. (CA IOUs, No. 52 at pp. 5-6)
    In the case of replacing an atmospheric GSWH with a power vent or 
condensing GSWH, DOE's installation model carefully considers different 
vent installation configurations (or situations). This includes adding 
costs for varying length of new PVC piping, piping going through 
multiple walls, patching and concealing vent piping in living areas, 
and addressing the vent termination requirements. These costs could 
range from relatively small amount in the case of close to the wall 
GSWH with side wall venting to complex venting installation. DOE 
believes that the range of values captures the variability that is 
likely to occur in the field.
    PHCC acknowledged that DOE suggests that alternate methods exist or 
are in development, but noted that it would be preferable to have fully 
vetted proven technology in place before hanging hopes on this. (PHCC, 
No. 40 at p. 3) DOE's analysis considers an alternative venting option 
that is currently on the market for commonly-vented non-condensing and 
condensing equipment, but did not include in its reference case 
analysis since it has limited field data associated with this 
technology. DOE is considering whether to include the alternative 
venting options in its installation model and/or conduct a sensitivity 
analysis with alternative venting options and invites stakeholder input 
on its approach.
    See appendix 8D of the NOPR TSD for further details about flue 
venting cost model and the alternative venting option.

[[Page 49109]]

    Atmos, One Gas, and Gas Association Commenters stated that DOE's 
analysis ignores consumers who do not live in single-family households 
who may need a water heater replacement. Atmos stated that DOE should 
consider the impacts on multifamily housing households whose water 
heaters vent atmospherically into a common vent shared with other 
households, because one household's water heater replacement may, due 
to the unavailability of models of atmospherically vented water 
heaters, compromise proper venting of other households' water heaters 
because the atmospheric venting system is likely to now be oversized. 
(Atmos, No. 38, p. 4; One Gas, No. 44 at p. 6; Gas Association 
Commenters, No. 41, Attachment 6 at pp. 8-9) DOE's preliminary analysis 
accounted for water heater installations (or replacements) in all 
residential building types including single-family (detached); single-
family (attached), multi-family, and mobile homes. DOE also considers 
separate installation costs for commercial buildings. For the NOPR 
analysis DOE refined its installation model so that it could better 
account for impacts of installations in multi-family and mobile home 
installations, including common vent installations in multifamily 
buildings. See appendix 8D of the NOPR TSD for disaggregated 
installation costs by building type.
c. Condensate Withdrawal for Higher Efficiency Design Options
    For the preliminary analysis, DOE assumed that 12.5 percent of 
condensing gas-fired water heaters and HPWHs in replacement situations 
required a condensate pump. For new construction, DOE assumed that a 
condensate pump would not be required since the building would be 
designed with the drains located nearby. PHCC stated that it is not a 
code requirement to have a drain near the water heater, and many times 
this drain is not there. PHCC has concerns that in the case of new 
construction, DOE does not contemplate condensate pumps and electric 
outlets for certain water heaters. In reality, these should be 
included, if the builder did not anticipate that these products would 
be at additional cost. (PHCC, No. 40 at pp. 3-4) Based on the input of 
an expert consultant, if a higher efficiency water heater that requires 
condensate withdrawal is selected for a project it is unlikely that a 
condensate pump with be required, since the plumbing plan will likely 
include a drain nearby to deal with the condensate. Similarly, the 
electrical plan will be adjusted so that the appropriate electrical 
outlet requirements are included. DOE believes these are very minor 
requirements to have in a construction plan, particularly with a long 
lead time to the first year of compliance. DOE did not change its 
approach for the NOPR analysis.
d. Heat Pump Water Heater Installation Costs
    For heat pump water heater installations, DOE included a number of 
adders for a fraction of the sample households. Most of these adders 
are associated with installing heat pump water heater designs in 
replacement installations.
    For replacement installations, DOE conducted a detailed analysis of 
installation costs when a baseline consumer water heater is replaced 
with higher efficiency designs, with particular attention to space 
constraint issues (associated with larger dimensions for heat pump 
water heaters compared to electric resistance water heaters), 
condensate withdrawal, and ductwork for heat pump water heaters 
installed in conditioned spaces. To address the larger dimensions of 
heat pump water heaters, installation adders included removing and 
replacing door jambs (to be able to fit the larger sized water heater), 
adding a tempering valve for increasing set-point temperatures to allow 
for a smaller-sized storage water heater that produces the same hot 
water output, or relocating water heater. Freeze protection is 
accounted for in the cost of condensate removal for a fraction of heat 
pump water heaters installed in non-conditioned spaces. DOE also 
included condensate removal installation adders for new owner and new 
construction HPWH installations.
    PHCC stated that the preliminary TSD's assumption that changing to 
a heat pump would only add, on average, 1 hour of labor is too low. 
Additional handling, drain work, re-piping, and programming of controls 
will require additional time. (PHCC, No. 40 at p. 4) The average 
additional labor varies by installation. In the preliminary analysis, 
the average additional labor hours is about 2 hours, which matches 
available field data. For the NOPR, DOE kept the same assumptions and 
methodological approach.
    NRECA stated that heat pump water heaters are required to maintain 
a specific minimum area around the heat pump water heater to function 
per manufacturer design specifications. They added that many homes, 
especially older housing stock or manufactured homes, do not allow for 
such a large space to house a water heater, and others would require 
home retrofits. NRECA concluded that heat pump water heaters are simply 
not practical in many of these cases. (NRECA, No. 33 at pp. 2-3) EEI 
stated that non-ducted HPWH require at least 700 cubic feet of space to 
operate properly and achieve efficiency levels presented in the 
technical support document. (EEI, No. 43 at p. 2) In contrast, NEEA, 
ACEEE, and NWPCC pointed to current research which indicates that HPWHs 
can be installed in much smaller spaces than manufacturer literature 
specifies. Specifically, under testing with a draw profile similar to 
the DOE-specified medium draw profile, compared to performance at OEM-
specified minimums, reducing room volume to 450 ft\3\ reduces COP by 
less than 10 percent, and reducing room volume to 200 ft\3\ reduces COP 
by less than one-third. They noted that remedies that have been 
successfully applied (adding small vents to the door, using a louvered 
door, installing passive ventilation grilles in the wall, and simple 
ducting to an adjacent room) are inexpensive and require little labor. 
(NEEA, ACEEE, and NWPCC, No. 47 at p. 5)
    To be conservative in its analysis, DOE accounted for the airflow 
requirements as specified in manufacturer installation manuals in its 
installation cost model. The additional costs of adding louvered doors, 
venting, or relocating a water heater are included for a fraction of 
installations, mainly for HPWHs installed in indoor locations. See 
appendix 8D of the NOPR TSD for more details.
    NRECA and EEI pointed to field studies from NREL, Fortis BC, and 
SMUD \62\ that provide a range of actual costs for installing heat pump 
water heaters when replacing electric resistance water heaters in space 
constrained areas such as closets where walls, ceilings, and doors must 
be removed and replaced or ductwork needs to be added. NRECA stated 
that DOE should update its analysis with real world information on the 
costs of such installations as it moves forward. (NRECA, No. 33 at pp. 
3-4; EEI, No. 43 at p. 2)
---------------------------------------------------------------------------

    \62\ See www.nrel.gov/docs/fy16osti/64904.pdf; energy350.com/wp-content/uploads/2018/11/CO2-Integrated-Heat-Pump-Water-Heater-Performance-Report-FINAL.pdf; and www.smud.org/-/media/Documents/Corporate/About-Us/Reports-and-Documents/2018/HPWH-Field-Testing-Report-1-6-2016.ashx.
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    NEEA, ACEEE, and NWPCC pointed to a survey of more than 100 
installers in the NW and SE regions to understand issues associated 
with HPWH installations. Survey respondents indicated an average of 
less than two

[[Page 49110]]

additional labor hours to install a HPWH compared with a conventional 
electric resistance product. Informed by this survey, NEEA believed 
that DOE's estimates for the likelihood of installation challenges and 
the associated additional labor hours are within reason. (NEEA, ACEEE, 
and NWPCC, No. 47, pp. 4-5) NYSERDA and Joint Advocates stated that 
DOE's HPWH installation cost estimates are robust and reasonable. 
(NYSERDA, No. 35 at p. 2; Joint Advocates, No. 34 at pp. 3-4) Joint 
Advocates stated that NEEA has experienced limited challenges with 
installation. In a survey of consumers who had received a utility 
rebate for a HPWH, NEEA found that 72 percent of professionally 
installed water heaters were installed in half a day or less, which 
appears to be in line with DOE's estimated installation time for HPWHs. 
The study found that only 15 percent of professionally installed HPWHs 
encountered some form of challenge (usually minor) during the 
installation process and only three percent of installations had to 
install ducting. Joint Advocates stated that the limited installation 
challenges are further corroborated by a recent study conducted by 
CLEAResult that evaluated 15 HPWHs installed in manufactured homes. 
(Joint Advocates, No. 47, pp. 4-5) NEEA, ACEEE, and NWPCC stated that 
NEEA's regional experience with more than 100,000 heat pump water 
heaters installed in the Northwest shows limited installation 
challenges and broad consumer satisfaction. (NEEA, ACEEE, and NWPCC, 
No. 47 at p. 3)
    DOE carefully reviewed the studies provided by stakeholders. DOE 
found that the NREL study, Fortis BC, Canadian study, and NEEA study 
results were consistent with DOE's installation model. DOE conducted a 
literature review and found that other studies in other regions 
(outside of California, Canada, Northeast) have similar results to 
DOE's analysis. See Appendix 8D of the NOPR TSD for more details of the 
literature review and comparison results.
    CA IOUs also stated that currently available HPWH products are 
unable to serve some ``space-constrained'' \63\ applications currently 
served by electric resistance storage water heaters. They noted that 
while the eventual development of HPWH products that can serve many of 
these space-constrained applications is possible, the current HPWH 
market is dominated by integrated models in a standard configuration 
(CA IOUs, No. 52 at pp. 6-7) AHRI, Rheem, and GE Appliances stated that 
DOE disregarded lowboy electric storage water heaters, which are space 
constrained products that are the only means for some consumers to meet 
their hot water needs. They stated that to comply with the current 
standards, these products have already reached the maximum size 
feasible for these space constrained applications, and there is no room 
available for these products to incorporate heat pump technologies or 
physically expand to accommodate additional insulation. They requested 
the Department to update its analysis to include lowboy electric 
storage water heaters, similar to what was done for short and tall 
ratio water heaters. (AHRI, No. 20 at p. 5; GEA, No. 46 at p. 1; Rheem, 
No. 45 at p. 4) PHCC stated that taller heaters will not fit in 
undercounter cabinets and that rough-in piping locations or building 
elements may also prevent taller units. PHCC added that instead of the 
space constraint option solutions listed, consumers likely will settle 
for a smaller capacity water heater rather than make extensive 
modifications to their buildings. (PHCC, No. 40 at p. 3) DOE did 
extensive revisions to its installation cost model to include 
installations of low-boy water heaters, which DOE estimated to be 
around 11 percent of the total 20 to 55 gallon electric storage water 
heater market. DOE assessed that many of these installations would 
require significant installation costs in order to install a HPWH. DOE 
notes that at the proposed standard, most models currently serving the 
small electric water heater market will remain available.
---------------------------------------------------------------------------

    \63\ CA IOUs define ``space-constrained'' as applications that 
include ``small closets, crawlspaces, and other locations where 
electric resistance storage water heaters function well, but HPWH 
either cannot physically fit, or do not have access to an adequate 
ambient air supply.'' (CA IOUs, No. 52 at p. 6).
---------------------------------------------------------------------------

    PHCC stated that DOE's analysis suggested that door frames be 
removed and re-installed to allow larger storage water heater design 
options (such as HPWH) products to be installed. PHCC believed that 
this is against the plumbing code for most jurisdictions in the U.S., 
which prescribe that structural elements or finished surfaces are not 
to be removed to service water heaters. (PHCC, No. 40 at p. 3) For the 
NOPR, to account for locations where plumbing codes might limit or ban 
this practice, DOE reduced the fraction of installations removing and 
re-installing door jambs. In these situations, the model selects an 
alternative installation, such as using a tempering valve, moving the 
water heater to a new location, or installing a split-system heat pump 
water heater. All relevant costs for these installations are accounted 
for in the analysis.
    PHCC questioned DOE's suggestion that smaller heaters can be 
installed with elevated storage temperatures and the use of a mixing 
valve can then reduce the supply water temperature, noting that this is 
a costly and maintenance-intensive solution and there is concern for 
inadvertent scalding situations with elevated temperatures. (PHCC, No. 
40 at p. 3) In contrast, CA IOUs stated that Thermostatic mixing valves 
that allow the storage temperature to be set above 125 [deg]F are 
relatively inexpensive, widely available, and required by the plumbing 
code in at least one state. (CA IOUs, No. 52 at pp. 8)
    DOE has found that for some applications mixing valves are 
currently being used in order to have higher hot water temperature for 
dishwashers or clothes washers, to provide more hot water capacity, and 
to reduce bacterial growth, while making sure the delivered water is 
within a safe range. In other cases, this approach is starting to be 
used more often to increase available hot water.\64\ Some water heaters 
have internal mixing valves that are meant to increase available hot 
water. In some cases, mixing valves could be used to address the 
increased hot water needs when the number of people in the household 
increases without replacing the entire water heater. DOE's updated test 
procedure includes a method to test water heaters in the highest 
storage tank temperature mode, which would be more representative for 
these types of installations. This is discussed more in section V.D.1. 
DOE's analysis in this NOPR accounts for a fraction of installations 
that might choose this approach.
---------------------------------------------------------------------------

    \64\ See www.geappliances.com/appliance/GE-Smart-50-Gallon-Electric-Water-Heater-with-Flexible-Capacity-GE50S10BMM.
---------------------------------------------------------------------------

3. Annual Energy Consumption
    For each sampled household and building, DOE determined the energy 
consumption for consumer water heaters at different efficiency levels 
using the approach described previously in section IV.E of this 
document.
    Higher-efficiency water heaters reduce the operating costs for a 
consumer, which can lead to greater use of the water heater. A direct 
rebound effect occurs when a product that is made more efficient is 
used more intensively, such that the expected energy savings from the 
efficiency improvement may not fully materialize. At the same time, 
consumers benefit

[[Page 49111]]

from increased utilization of products due to rebound. Although some 
households may increase their water heater use in response to increased 
efficiency, DOE does not include the rebound effect in the LCC analysis 
because the increased utilization of the water heater provides value to 
the consumer. DOE does include rebound in the NIA for a conservative 
estimate of national energy savings and the corresponding impact to 
consumer NPV. See section IV.H of this document and chapter 10 of the 
NOPR TSD for more details.
4. Energy Prices
    Because marginal energy prices more accurately capture the 
incremental savings associated with a change in energy use from higher 
efficiency, it provides a better representation of incremental change 
in consumer costs than average energy prices. Therefore, DOE applied 
average energy prices for the energy use of the product purchased in 
the no-new-standards case, and marginal energy prices for the 
incremental change in energy use associated with the other efficiency 
levels considered.
    DOE derived average monthly marginal residential and commercial 
electricity, natural gas, and LPG prices for each state using data from 
EIA.65 66 67 DOE calculated marginal monthly regional energy 
prices by: (1) first estimating an average annual price for each 
region; (2) multiplying by monthly energy price factors, and (3) 
multiplying by seasonal marginal price factors for electricity, natural 
gas, and LPG. The analysis used historical data up to 2022 for 
residential and commercial natural gas and electricity prices and 
historical data up to 2021 for LPG and fuel oil prices. Further details 
may be found in chapter 8 of the NOPR TSD.
---------------------------------------------------------------------------

    \65\ U.S. Department of Energy-Energy Information 
Administration, Form EIA-861M (formerly EIA-826) detailed data 
(2022) (Available at: www.eia.gov/electricity/data/eia861m/) (Last 
accessed May 1, 2023).
    \66\ U.S. Department of Energy-Energy Information 
Administration, Natural Gas Navigator (2022) (Available at: 
www.eia.gov/naturalgas/data.php) (Last accessed May 1, 2023).
    \67\ U.S. Department of Energy-Energy Information 
Administration, State Energy Data System (``SEDS'') (2021) 
(Available at: www.eia.gov/state/seds/) (Last accessed May 1, 2023).
---------------------------------------------------------------------------

    GEAG is concerned with DOE's approach in the preliminary TSD at 
section 2.8.2.1 that conflates marginal energy prices with marginal 
energy rates. CEAG states that DOE's method of averaging inflates 
consumer savings estimates. GEAG recommends another method instead 
(called CMER) which is described in a paper from Spire to the NAS peer 
review committee. GEAG would like to see the CMER method used as a 
reality/spot check until DOE gets accustomed to it. (GEAG, No. 36 at p. 
3)
    DOE is currently reviewing the CMER method proposed by GEAG. In the 
past, stakeholders have proposed alternative methods and data to 
estimate marginal natural gas prices. For example, DOE compared 
marginal price factors developed by DOE from the EIA data to develop 
seasonal marginal price factors for 23 gas tariffs provided by the Gas 
Technology Institute for the 2016 residential boilers energy 
conservation standards rulemaking.\68\ DOE found that the winter price 
factors used by DOE are generally comparable to those computed from the 
tariff data, indicating that DOE's marginal price estimates are 
reasonable at average usage levels. The summer price factors are also 
generally comparable. Of the 23 tariffs analyzed, eight have multiple 
tiers, and of these eight, six have ascending rates and two have 
descending rates. The tariff-based marginal factors use an average of 
the two tiers as the commodity price. A full tariff-based analysis 
would require information about the household's total baseline gas 
usage (to establish which tier the consumer is in), and a weight factor 
for each tariff that determines how many customers are served by that 
utility on that tariff. These data are generally not available in the 
public domain. DOE's use of EIA State-level data effectively averages 
overall consumer sales in each State, and so incorporates information 
from all utilities. DOE's approach is, therefore, more representative 
of a large group of consumers with diverse baseline gas usage levels 
than an approach that uses only tariffs.
---------------------------------------------------------------------------

    \68\ GTI provided a reference located in the docket of DOE's 
2016 rulemaking to develop energy conservation standards for 
residential boilers. (Docket No. EERE-2012-BT-STD-0047-0068) 
(Available at: www.regulations.gov/document/EERE-2012-BT-STD-0047-0068) (Last accessed May 1, 2023).
---------------------------------------------------------------------------

    DOE notes that within a State, there could be significant variation 
in the marginal price factors, including differences between rural and 
urban rates. In order to take this to account, DOE developed marginal 
price factors for each individual household using RECS 2015 billing 
data. These data are then normalized to match the average State 
marginal price factors, which are equivalent to a consumption-weighted 
average marginal price across all households in the State. DOE's 
methodology allows energy prices to vary by sector, region and season. 
For more details on the comparative analysis and updated marginal price 
analysis, see appendix 8E of this NOPR TSD.
    To estimate energy prices in future years, DOE multiplied the 2022 
energy prices by the projection of annual average price changes for 
each of the 50 U.S. states and District of Columbia from the Reference 
case in AEO2023, which has an end year of 2050. \69\ To estimate price 
trends after 2050, DOE used the average annual growth rate in prices 
from 2046 to 2050 based on the methods used in the 2022 Life-Cycle 
Costing Manual for the Federal Energy Management Program 
(``FEMP'').\70\
---------------------------------------------------------------------------

    \69\ EIA. Annual Energy Outlook 2023 with Projections to 2050. 
Washington, DC. Available at www.eia.gov/forecasts/aeo/ (last 
accessed May 1, 2023).
    \70\ Lavappa, Priya D. and J. D. Kneifel. Energy Price Indices 
and Discount Factors for Life-Cycle Cost Analysis--2022 Annual 
Supplement to NIST Handbook 135. National Institute of Standards and 
Technology (NIST). NISTIR 85-3273-37, available at www.nist.gov/publications/energy-price-indices-and-discount-factors-life-cycle-cost-analysis-2022-annual (last accessed May 1, 2023).
---------------------------------------------------------------------------

    Joint Advocates believe that the current DOE approach may be 
significantly underestimating future natural gas prices. Joint 
Advocates note that the national electrification trends will result in 
decline in gas customers and/or consumption, which will result in an 
increase in gas prices for the remaining customers. (Joint Advocates, 
No. 34 at p. 3) NRDC and RMI also stated that customer exit from the 
gas system associated with electrification will tend to increase rates 
for remaining gas customers, because the fixed costs of the gas system 
will be spread over a smaller number of users. NRDC and RMI urge DOE to 
take into account the potential for such increases in average gas 
rates. (NRDC and RMI, No. 37 at p. 1)
    Because the effects of widespread electrification are very 
uncertain at this point, DOE prefers to rely on the latest AEO price 
forecasts in its analysis. DOE notes that if future natural gas prices 
end up higher than DOE estimates due to electrification, the economic 
justification for the standards proposed for gas-fired water heaters in 
this NOPR would become stronger still.
    The CA IOUs proposed a methodology for developing adjustment 
factors for EIA natural gas price forecasts. The approach adjusts the 
most recent natural gas price forecast based on historical trends in 
forecast accuracy, thus narrowing the difference between forecasted and 
actual prices. CA IOUs also recommend that DOE also incorporate 
scenario analyses in its LCC calculations to consider the future impact 
of these factors on the retail

[[Page 49112]]

price of natural gas. (CA IOU, No. 52 at pp. 2-5) NYSERDA also 
encouraged DOE to improve the accuracy of natural gas retail price 
forecasts by using the CA IOUs approach. (NYSERDA, No. 51 at p. 2)
    Atmos recommends that the Department modify its current use of 
single forecasts of consumer energy prices with forecast adjustments of 
plus and minus five percent to account for forecasting errors, and then 
run the analysis under these three price forecast trends. One Gas 
suggests for parity with forecasts of electricity prices, error factors 
of plus or minus 6% in forecast prices appear as reasonable alternative 
price trends for natural gas and propane, as well as a systematic 
adjustment in the AEO 2021 natural gas price out to 2050 and beyond on 
the order of 15%. Further, Atmos and One Gas stated that the EIA data 
has diminishing accuracy and reliability in out years of the forecast 
period. (Atmos, No. 38 at p. 5; One Gas, No. 44 at pp. 9-10; Gas 
Association Commenters, No. 41, Attachment 6 at p. 12)
    DOE's analysis uses price forecasts from the latest AEO reference 
case and includes sensitivity analysis using high and low economic 
growth scenarios. DOE is currently evaluating the use of other price 
forecast scenarios (such as high/low oil gas supply, high/low oil 
price, high/low renewables cost) as well as the approaches suggested by 
the stakeholders. DOE uses other inputs from the AEO analysis and DOE 
contends that it is important for it to maintain consistency with EIA 
in DOE's inputs and energy prices.
5. Maintenance and Repair Costs
    Repair costs are associated with repairing or replacing product 
components that have failed in an appliance; maintenance costs are 
associated with maintaining the operation of the product. Typically, 
small incremental increases in product efficiency produce no, or only 
minor, changes in repair and maintenance costs compared to baseline 
efficiency products. DOE included additional maintenance and repair 
costs for higher efficiency consumer water heaters (including 
maintenance costs associated with condensate withdrawal, heat pump 
component filter cleaning, and deliming of the heat exchanger and 
repair costs associated with electronic ignition, controls, and blowers 
for fan-assisted designs, compressor, evaporator fan) based on 2023 
RSMeans data.\71\ DOE accounted for regional differences in labor costs 
by using RSMeans regional cost factors.
---------------------------------------------------------------------------

    \71\ RSMeans Company, Inc., RS Means Facilities Repair and 
Maintenance (2023), available at www.rsmeans.com/ (last accessed May 
1, 2023).
---------------------------------------------------------------------------

    BWC states that there are a number of labor and material 
maintenance and repair costs that are mischaracterized. (BWC, No. 32 at 
p. 6) BWC did not provide any details, so DOE was unable to determine 
what they believe is mischaracterized. However, DOE welcomes specific 
suggestions as to how it might improve its maintenance and repair 
methodology, including accounting for the value of time spent by 
consumers performing regular maintenance (e.g., cleaning heat pump air 
filters).
    The methodology and data sources are described in detail in 
appendix 8F of the NOPR TSD.
6. Product Lifetime
    Product lifetime is the age at which an appliance is retired from 
service. DOE conducted an analysis of water heater lifetimes based on 
the methodology described in a journal paper.\72\ For this analysis, 
DOE relied on RECS 1990, 1993, 2001, 2005, 2009, 2015, and 2020.\73\ 
DOE also used the U.S. Census's biennial American Housing Survey 
(``AHS''), from 1974-2021, which surveys all housing, noting the 
presence of a range of appliances.\74\ DOE used the appliance age data 
from these surveys, as well as the historical water heater shipments, 
to generate an estimate of the survival function. The survival function 
provides a lifetime range from minimum to maximum, as well as an 
average lifetime. DOE estimates the average product lifetime to be 
around 15 years for storage water heaters and around 20 years for 
instantaneous water heaters. DOE is considering whether to conduct a 
sensitivity analysis with higher and lower lifetimes for all water 
heater product classes and invites stakeholder input on its approach.
---------------------------------------------------------------------------

    \72\ Lutz, J., A. Hopkins, V. Letschert, V. Franco, and A. 
Sturges, Using national survey data to estimate lifetimes of 
residential appliances, HVAC&R Research (2011) 17(5): pp. 28 
(Available at: www.tandfonline.com/doi/abs/10.1080/10789669.2011.558166) (Last accessed May 1, 2023).
    \73\ U.S. Department of Energy: Energy Information 
Administration, Residential Energy Consumption Survey (``RECS''), 
Multiple Years (1990, 1993, 1997, 2001, 2005, 2009, 2015, and 2020) 
(Available at: www.eia.gov/consumption/residential/) (Last accessed 
May 1, 2023).
    \74\ U.S. Census Bureau: Housing and Household Economic 
Statistics Division, American Housing Survey, Multiple Years (1974, 
1975, 1976, 1977, 1978, 1979, 1980, 1981, 1983, 1985, 1987, 1989, 
1991, 1993, 1995, 1997, 1999, 2001, 2003, 2005, 2007, 2009, 2011, 
2013, 2015, 2017, 2019, and 2021) (Available at: www.census.gov/programs-surveys/ahs/) (Last accessed April 1, 2023).
---------------------------------------------------------------------------

7. Discount Rates
    In the calculation of LCC, DOE applies discount rates appropriate 
to households to estimate the present value of future operating cost 
savings. DOE estimated a distribution of discount rates for consumer 
water heaters based on the opportunity cost of consumer funds.
    DOE applies weighted average discount rates calculated from 
consumer debt and asset data, rather than marginal or implicit discount 
rates.\75\ The LCC analysis estimates net present value over the 
lifetime of the product, so the appropriate discount rate will reflect 
the general opportunity cost of household funds, taking this time scale 
into account. Given the long time horizon modeled in the LCC analysis, 
the application of a marginal interest rate associated with an initial 
source of funds is inaccurate. Regardless of the method of purchase, 
consumers are expected to continue to rebalance their debt and asset 
holdings over the LCC analysis period, based on the restrictions 
consumers face in their debt payment requirements and the relative size 
of the interest rates available on debts and assets. DOE estimates the 
aggregate impact of this rebalancing using the historical distribution 
of debts and assets.
---------------------------------------------------------------------------

    \75\ The implicit discount rate is inferred from a consumer 
purchase decision between two otherwise identical goods with 
different first cost and operating cost. It is the interest rate 
that equates the increment of first cost to the difference in net 
present value of lifetime operating cost, incorporating the 
influence of several factors: transaction costs; risk premiums and 
response to uncertainty; time preferences; interest rates at which a 
consumer is able to borrow or lend. The implicit discount rate is 
not appropriate for the LCC analysis because it reflects a range of 
factors that influence consumer purchase decisions, rather than the 
opportunity cost of the funds that are used in purchases.
---------------------------------------------------------------------------

    To establish residential discount rates for the LCC analysis, DOE 
identified all relevant household debt or asset classes in order to 
approximate a consumer's opportunity cost of funds related to appliance 
energy cost savings. It estimated the average percentage shares of the 
various types of debt and equity by household income group using data 
from the Federal Reserve Board's triennial Survey of Consumer Finances 
\76\ (``SCF'') starting in 1995 and ending in 2019. Using the SCF and 
other sources, DOE developed a distribution of rates for each type of 
debt and asset

[[Page 49113]]

by income group to represent the rates that may apply in the year in 
which amended standards would take effect. DOE assigned each sample 
household a specific discount rate drawn from one of the distributions. 
The average rate across all types of household debt and equity and 
income groups, weighted by market share of each product class, is 4.1 
percent. See chapter 8 of the NOPR TSD for further details on the 
development of consumer discount rates.
---------------------------------------------------------------------------

    \76\ The Federal Reserve Board, Survey of Consumer Finances 
(1995, 1998, 2001, 2004, 2007, 2010, 2013, 2016, and 2019) 
(Available at: www.federalreserve.gov/econres/scfindex.htm) (last 
accessed May 1, 2023). The Federal Reserve Board is currently 
processing the 2022 Survey of Consumer Finances, which is expected 
to be fully available in late 2023.
---------------------------------------------------------------------------

    To establish commercial discount rates for the small fraction of 
consumer water heaters installed in commercial buildings, DOE estimated 
the weighted-average cost of capital using data from Damodaran 
Online.\77\ The weighted-average cost of capital is commonly used to 
estimate the present value of cash flows to be derived from a typical 
company project or investment. Most companies use both debt and equity 
capital to fund investments, so their cost of capital is the weighted 
average of the cost to the firm of equity and debt financing. DOE 
estimated the cost of equity using the capital asset pricing model, 
which assumes that the cost of equity for a particular company is 
proportional to the systematic risk faced by that company. DOE's 
commercial discount rate approach is based on the methodology described 
in a LBNL report, and the distribution varies by business activity.\78\ 
The average rate for consumer water heaters used in commercial 
applications in this NOPR analysis, across all business activity and 
weighted by the market share of each product class, is 6.9 percent.
---------------------------------------------------------------------------

    \77\ Damodaran Online, Data Page: Costs of Capital by Industry 
Sector (2021) (Available at: pages.stern.nyu.edu/~adamodar/) (Last 
accessed May 1, 2023).
    \78\ Fujita, S., Commercial, Industrial, and Institutional 
Discount Rate Estimation for Efficiency Standards Analysis: Sector-
Level Data 1998-2018 (Available at: ees.lbl.gov/publications/commercial-industrial-and) (Last accessed May 1, 2023).
---------------------------------------------------------------------------

    See chapter 8 of this NOPR TSD for further details on the 
development of consumer and commercial discount rates.
8. Energy Efficiency Distribution in the No-New-Standards Case
    To accurately estimate the share of consumers that would be 
affected by a potential energy conservation standard at a particular 
efficiency level, DOE's LCC analysis considered the projected 
distribution (market shares) of product efficiencies under the no-new-
standards case (i.e., the case without amended or new energy 
conservation standards). This approach reflects the fact that some 
consumers may purchase products with efficiencies greater than the 
baseline levels.
    To estimate the energy efficiency distribution of consumer water 
heaters for 2030, DOE used available shipments data by efficiency 
including in previous AHRI submitted historical shipment data,\79\ 
ENERGY STAR unit shipments data,\80\ and data from a 2022 BRG Building 
Solutions report. \81\ To cover gaps in the available shipments data, 
DOE used DOE's public CCMS model database \82\ and AHRI certification 
directory.\83\
---------------------------------------------------------------------------

    \79\ AHRI. Confidential Instantaneous Gas-fired Water Heater 
Shipments Data from 2004-2007 to LBNL. March 3, 2008; AHRI. Gas-
fired and Electric Storage Water Heater Shipments Data to DOE. March 
11, 2008; AHRI. Gas-fired Storage Heater Shipments Data to DOE. 
March 18, 2009.
    \80\ ENERGY STAR. Unit Shipments data 2010-2021. multiple 
reports. (Available at: www.energystar.gov/partner_resources/products_partner_resources/brand_owner_resources/unit_shipment_data) 
(Last accessed May 1, 2023).
    \81\ BRG Building Solutions. The North American Heating & 
Cooling Product Markets (2022 Edition). 2022.
    \82\ U.S. Department of Energy-Appliance & Equipment Standards 
Program. Compliance Certification Management System (CCMS) for 
Consumer Water Heaters (Downloaded June 1, 2022). (Available at 
www.regulations.doe.gov/certification-data/CCMS-4-Water_Heaters.html#q=Product_Group_s%3A%22Water%20Heaters%22) (Last 
accessed May 1, 2023).
    \83\ Air Conditioning Heating and Refrigeration Institute. 
Consumer's Directory of Certified Efficiency Ratings for Heating and 
Water Heating Equipment. June 1, 2022. (Available at 
www.ahridirectory.org) (Last accessed May 1, 2023).
---------------------------------------------------------------------------

    NEEA, ACEEE, and NWPCC provided the market data regarding the 
market share of HPWHs in the northwest. The high percentage of 
installations in new homes has been driven by building codes combined 
with utility incentives, bulk pricing, and a workforce that has quickly 
become adept at installing HPWHs. (NEEA, ACEEE, and NWPCC, No. 47 at p. 
3) Based on the provided data, DOE was able to refine the assignment of 
HPWHs in the Northwest for replacements and new construction.
    The estimated market shares for the no-new-standards case for 
consumer water heaters are shown in Table IV.28. See chapter 8 of the 
NOPR TSD for further information on the derivation of the efficiency 
distributions.

                          Table IV.27--No-New-Standards Case Energy Efficiency Distributions in 2030 for Consumer Water Heaters
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                   Draw pattern
                                                         -----------------------------------------------------------------------------------------------
                                                                        Low                           Medium                           High
                    Efficiency level                     -----------------------------------------------------------------------------------------------
                                                                           Market Share                    Market Share                    Market Share
                                                               UEF*             (%)            UEF*             (%)            UEF*             (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                            Gas-Fired Storage Water Heaters, =20 gal and <=55 gal
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................................            0.54            63.7            0.58            57.1            0.63            54.3
1.......................................................            0.57            15.3            0.60            21.3            0.64            22.8
2.......................................................            0.59             6.0            0.64             4.4            0.68             4.7
3.......................................................            0.60            12.1            0.65            14.8            0.69            15.7
4.......................................................            0.71             2.8            0.75             0.9            0.80             1.0
5.......................................................            0.77             0.0            0.81             1.5            0.88             1.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        Oil-Fired Storage Water Heaters, <=50 gal
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................................  ..............  ..............  ..............  ..............            0.64            66.4
1.......................................................  ..............  ..............  ..............  ..............            0.66            16.5
2.......................................................  ..............  ..............  ..............  ..............            0.68            17.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                  Small Electric Storage Water Heaters, =20 gal and <=35 gal and FHR <51 gal
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................................     0.91/0.92**            99.0  ..............  ..............  ..............  ..............

[[Page 49114]]

 
1.......................................................            2.00             1.0  ..............  ..............  ..............  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                 Electric Storage Water Heaters, =20 gal and <=55 gal, excluding Small ESWHs
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................................            0.91            87.8            0.92            86.9            0.93            84.2
1.......................................................            2.30             0.9            2.30             0.6            2.30             0.7
2.......................................................            3.29             7.3            3.35             8.2            3.47            11.0
3.......................................................            3.69             4.0            3.75             4.3            3.87             4.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                             Electric Storage Water Heaters, 55 gal and <=120 gal
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................................  ..............  ..............            2.05             2.6            2.15             3.0
1.......................................................  ..............  ..............            2.50            11.2            2.50            11.4
2.......................................................  ..............  ..............            3.35            74.6            3.45            73.8
3.......................................................  ..............  ..............            3.90            11.7            4.00            11.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                        Gas-Fired Instantaneous Water Heaters, <2 gal and 50,000 Btu/h
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................................  ..............  ..............            0.81            30.7            0.81            29.7
1.......................................................  ..............  ..............            0.87             8.1            0.89             7.6
2.......................................................  ..............  ..............            0.91            47.3            0.93            46.6
3.......................................................  ..............  ..............            0.92             5.6            0.95             7.2
4.......................................................  ..............  ..............            0.93             8.3            0.97             9.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
* UEF at the representative rated capacity.
** 0.91 UEF at 30 gallon effective volume and 0.92 UEF at 35 gallon effective volume.

    The LCC Monte Carlo simulations draw from the efficiency 
distributions and randomly assign an efficiency to the water heater 
purchased by each sample household in the no-new-standards case 
according to these distributions.
    Finally, DOE considered the 2019 AHCS survey,\84\ which includes 
questions to recent purchasers of HVAC equipment regarding the 
perceived efficiency of their equipment (Standard, High, and Super High 
Efficiency), as well as questions related to various household and 
demographic characteristics. DOE did not find similar data for consumer 
water heaters, but believes that the HVAC data could be applicable to 
other larger appliances such as consumer water heaters. From these 
data, DOE found that households with larger square footage exhibited a 
higher fraction of High- or Super-High efficiency equipment installed. 
DOE used the AHCS data to adjust its water heater efficiency 
distributions as follows: (1) the market share of higher efficiency 
equipment for households under 1,500 sq. ft. was decreased by 5 
percentage points; and (2) the market share of condensing equipment for 
households above 2,500 sq. ft. was increased by 5 percentage points.
---------------------------------------------------------------------------

    \84\ Decision Analysts, 2019 American Home Comfort Studies 
(Available at: www.decisionanalyst.com/Syndicated/HomeComfort/) 
(Last accessed May 1, 2023).
---------------------------------------------------------------------------

    ONE Gas and Gas Association Commenters stated that no attempts 
appear to have been made to address consumer choice and trade-offs (NAS 
Report RECOMMENDATION 4-3), and instead assignment of consumer purchase 
decisions again appears to be continuing to use a random assignment of 
consumers across the design options. One Gas further stated that the 
consumer choice and decision making is not accounted for in rational 
economic terms among the options of: (1) savings that could be 
demonstrated among the choices of a baseline water heater against the 
proposed efficiency levels (EL) or (2) savings that could accrue from 
continuing to own a baseline product versus purchasing an EL-rated 
product (NAS Report RECOMMENDATION 4-5). (ONE Gas, No. 44 at p. 6; Gas 
Association Commenters, No. 41, attachment 6, p. 8) Atmos also stated 
that consistent with NAS Recommendation 4-5, DOE should account for 
consumer choice in rational economic terms, including the: (1) savings 
that could be demonstrated among the choices of a baseline water heater 
against the proposed TSLs or (2) savings that could accrue from 
continuing to own a baseline product versus purchasing TSL efficiency 
products. These savings are crucial for estimating the benefits of 
appliance replacement programs that governments and utilities may 
consider, and such savings analyses will better illuminate potential 
consumer impacts. Atmos also stated that consistent with NAS 
Recommendation 4-13, DOE should assume that consumers will behave 
rationally and purchase the model that produces the most life-cycle 
cost savings. Atmos pointed out that DOE selected the minimum 
efficiency water heater as the baseline model, but this model will not 
produce the most life-cycle cost savings in all cases. Atmos stated 
that DOE should not rely on a one-size-fits-all assumption, as doing so 
underestimates costs to consumers and overestimates purported benefits 
of energy efficiency standards. (Atmos, No. 38 at p. 3)
    Atmos stated that DOE's use of a random assignment of consumers 
across design options instead of assigning base-case efficiencies with 
discretion, results in an inaccurate overstatement of energy efficiency 
standards' potential to produce economic benefits for consumers and is 
contrary to NAS Recommendation 4-3, which states that the agency 
``should collect data on consumer choices in appliance markets and 
estimate a discrete choice model of consumer behavior to quantify the

[[Page 49115]]

trade-offs that consumers face from changes in appliance performance.'' 
Atmos stated that, at a minimum, DOE should provide further explanation 
of its efforts to account for correlated variables in the life-cycle 
cost analysis. (Atmos, No. 38 at p. 2) Further, Atmos urged DOE to 
assign base-case efficiencies with discretion, rather than random 
assignment. Atmos disagrees with DOE that the current method of 
efficiency assignment, which is in part random, ``is a better 
representation of actual behavior in the field compared to assigning 
water heater efficiency based solely on imputed cost-effectiveness.'' 
Atmos stated that, at minimum, as recommended in the NAS report ``DOE 
should place greater emphasis on providing an argument for the 
plausibility and magnitude of any market failure related to the energy 
efficiency gap in their analyses.'' (Atmos, No. 38 at p. 4) Atmos urged 
DOE to consider assigning base-case efficiencies with discretion, 
rather than randomly, and suggested DOE place greater emphasis on 
explaining the plausibility and magnitude of any market failure related 
to the energy efficiency gap in its analyses. (Atmos, No. 19 at pp. 4-
5)
    ONE Gas and Gas Association Commenters also stated that the 
Department appears to have not undertaken measures to address 
stakeholder concerns related to past issues of random assignment of 
consumers to appliance purchase decisions in the base case life cycle 
cost analysis. Further, ONE Gas stated that DOE has never presented 
analysis that justifies linkages between market failure and random 
purchase behavior and pointed out that there is no evidence that the 
recommendations of the National Academies of Sciences (NAS) report to 
improve its coverage of market failure in relation to the setting of 
appliance minimum efficiency standards is implemented in DOE's 
analysis. (ONE Gas, No. 44 at pp.4-5; Gas Association Commenters, #41, 
attachment 6 at p. 6) ONE Gas and Gas Association Commenters 
recommended that to address the issues in consumer base case 
definition, the Department should modify the LCC spreadsheet by using 
either of the two methods suggested by the gas industry--Correlated 
Consumer Attributes Approach or Rational Consumer Economic Choice 
Approach. Under a Correlated Consumer Attribute Approach, the 
Department would use the functionality of the Monte Carlo software to 
avoid presumed non-rational economic decision making by implementing 
simulation correlations of these variables and develop base case 
conditions that better approximate consumer decision making. Under the 
Rational Consumer Economic Choice Approach would calculate for each 
simulated consumer the most life cycle cost efficient alternative among 
available water heating products and assign that as the base case over 
which improvements provided by higher efficiency options would be 
evaluated. (ONE Gas, No. 44 at p. 5; Gas Association Commenters, No. 
41, attachment 6 at p. 7)
    Gas Association Commenters stated that DOE must consider whether 
and to what extent there are market failures that significantly impede 
economically beneficial investments in higher-efficiency products, 
citing to Am. Pub. Gas Ass'n v. United States Dep't of Energy, 22 F4th 
1018 (D.C. Cir. 2022) and a Consensus Study Report by the National 
Academies of Sciences. The Gas Association Commenters also stated that 
DOE's attempts to dismiss prior comment on this issue (see TSD at 2-
58--2-59) are non-responsive. Gas Association Commenters also stated 
that DOE's LCC analysis completely ignores the fact that--in the 
absence of new standards--purchasers tend to make the most economically 
attractive efficiency investments and decline those with the most 
substantial net costs. Gas Association Commenters stated that DOE's 
analysis ``assigns'' even the most economically attractive and highest 
net-cost efficiency investment outcomes to the base case for analysis 
randomly, as though purchasers never consider the economics of 
potential efficiency investments regardless of the economic stakes 
involved. Further, Gas Association Commenters stated that because there 
is no basis to suggest that standards are needed to ensure that 
consumers will choose more efficient products when those products have 
lower initial costs, DOE should assign such cases to the base case for 
analysis rather than assigning them to the base or standard cases 
randomly. (Gas Association Commenters, No. 41, attachment 1 at p. 5)
    Gas Association Commenters requested that DOE should assign all 
cases in which a purchaser would fail to invest in a more efficient 
product that would pay for itself within a year, to the base case for 
analysis rather than assigning them randomly. They stated that this 
would provide a useful screening test to determine whether there is any 
reasonable possibility that new standards could produce net LCC 
benefits for consumers. Gas Association Commenters further requested 
that DOE report the resulting change in the average LCC outcome before 
it proceeds with further standards development activity. Gas 
Association Commenters also stated that if there are market failures 
that could cause purchasers facing higher initial costs to forego 
economically beneficial efficiency investments, DOE should: (1) 
identify the specific nature and impact of any market failures 
allegedly interfering with sound economic decision-making on the part 
of purchasers of consumer water heaters; and (2) disclose the evidence 
DOE relied upon to support its assessment of such market failures. 
Additionally, to enable interested parties to understand and review 
DOE's analysis of any market failure impacts, Gas Association 
Commenters requested DOE (3) disclose the range and distribution of the 
most economically beneficial individual LCC outcomes in both its base 
case and rule outcome case; (4) explain its justification for the 
distribution of those outcomes; (5) disclose the range and distribution 
of the highest net cost individual LCC outcomes in both its base case 
and rule outcome case; and (6) explain its justification for the 
distribution of those outcomes. (Gas Association Commenters, No. 41, 
attachment 1 at pp. 6-7)
    While DOE acknowledges that economic factors may play a role when 
consumers, commercial building owners, or builders decide on what type 
of water heater to install, assignment of water heater efficiency for a 
given installation, based solely on economic measures such as life-
cycle cost or simple payback period most likely would not fully and 
accurately reflect actual real-world installations. There are a number 
of market failures discussed in the economics literature that 
illustrate how purchasing decisions with respect to energy efficiency 
are unlikely to be perfectly correlated with energy use, as described 
below. While this literature is not specific to water heaters, DOE 
maintains that the method of assignment, which is in part random, is a 
reasonable approach, one that simulates behavior in the water heater 
market, where market failures and other consumer preferences result in 
purchasing decisions not being perfectly aligned with economic 
interests, more realistically than relying only on apparent cost-
effectiveness criteria derived from the limited information in CBECS or 
RECS. DOE further emphasizes that its approach does not assume that all 
purchasers of water heater make economically irrational decisions 
(i.e., the lack of a correlation

[[Page 49116]]

is not the same as a negative correlation). As part of the random 
assignment, some homes or buildings with large hot water use will be 
assigned higher efficiency water heaters, and some homes or buildings 
with particularly low hot water use will be assigned baseline water 
heaters, which aligns with the available data. By using this approach, 
DOE acknowledges the variety of market failures and other consumer 
behaviors present in the water heater market. This approach minimizes 
any bias in the analysis by using random assignment, as opposed to 
assuming certain market conditions that are unsupported given the 
available evidence.
    First, consumers are motivated by more than simple financial trade-
offs. There are consumers who are willing to pay a premium for more 
energy-efficient products because they are environmentally 
conscious.\85\ There are also several behavioral factors that can 
influence the purchasing decisions of complicated multi-attribute 
products, such as water heaters. For example, consumers (or decision 
makers in an organization) are highly influenced by choice 
architecture, defined as the framing of the decision, the surrounding 
circumstances of the purchase, the alternatives available, and how 
they're presented for any given choice scenario.\86\ The same consumer 
or decision maker may make different choices depending on the 
characteristics of the decision context (e.g., the timing of the 
purchase, competing demands for funds), which have nothing to do with 
the characteristics of the alternatives themselves or their prices. 
Consumers or decision makers also face a variety of other behavioral 
phenomena including loss aversion, sensitivity to information salience, 
and other forms of bounded rationality.\87\ Thaler, who won the Nobel 
Prize in Economics in 2017 for his contributions to behavioral 
economics, and Sunstein point out that these behavioral factors are 
strongest when the decisions are complex and infrequent, when feedback 
on the decision is muted and slow, and when there is a high degree of 
information asymmetry.\88\ These characteristics describe almost all 
purchasing situations of appliances and equipment, including water 
heaters. The installation of a new or replacement water heater is done 
infrequently, as evidenced by the mean lifetime for water heaters. 
Additionally, it would take at least one full water heating season for 
any impacts on operating costs to be fully apparent. Further, if the 
purchaser of the water heater is not the entity paying the energy costs 
(e.g., a building owner and tenant), there may be little to no feedback 
on the purchase. Additionally, there are systematic market failures 
that are likely to contribute further complexity to how products are 
chosen by consumers, as explained in the following paragraphs.
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    \85\ Ward, D.O., Clark, C.D., Jensen, K.L., Yen, S.T., & 
Russell, C.S. (2011): ``Factors influencing willingness-to pay for 
the ENERGY STAR[supreg] label,'' Energy Policy, 39(3), 1450-1458. 
(Available at: www.sciencedirect.com/science/article/abs/pii/S0301421510009171) (Last accessed May 1, 2023).
    \86\ Thaler, R.H., Sunstein, C.R., and Balz, J.P. (2014). 
``Choice Architecture'' in The Behavioral Foundations of Public 
Policy, Eldar Shafir (ed).
    \87\ Thaler, R.H., and Bernartzi, S. (2004). ``Save More 
Tomorrow: Using Behavioral Economics in Increase Employee Savings,'' 
Journal of Political Economy 112(1), S164-S187. See also Klemick, 
H., et al. (2015) ``Heavy-Duty Trucking and the Energy Efficiency 
Paradox: Evidence from Focus Groups and Interviews,'' Transportation 
Research Part A: Policy & Practice, 77, 154-166. (providing evidence 
that loss aversion and other market failures can affect otherwise 
profit-maximizing firms).
    \88\ Thaler, R.H., and Sunstein, C.R. (2008). Nudge: Improving 
Decisions on Health, Wealth, and Happiness. New Haven, CT: Yale 
University Press.
---------------------------------------------------------------------------

    The first of these market failures--the split-incentive or 
principal-agent problem--is likely to affect water heaters more than 
many other types of appliances. The principal-agent problem is a market 
failure that results when the consumer that purchases the equipment 
does not internalize all of the costs associated with operating the 
equipment. Instead, the user of the product, who has no control over 
the purchase decision, pays the operating costs. There is a high 
likelihood of split incentive problems in the case of rental properties 
where the landlord makes the choice of what water heater to install, 
whereas the renter is responsible for paying energy bills. In the LCC 
sample, a significant fraction of households with a water heater are 
renters. These fractions are significantly higher for low-income 
households (see section IV.I of this document). In new construction, 
builders influence the type of water heater used in many homes but do 
not pay operating costs. Finally, contractors install a large share of 
water heaters in replacement situations, and they can exert a high 
degree of influence over the type of water heater purchased.
    In addition to the split-incentive problem, there are other market 
failures that are likely to affect the choice of water heater 
efficiency made by consumers. For example, emergency replacements of 
essential equipment such as water heaters are strongly biased toward 
like-for-like replacement (i.e., replacing the non-functioning 
equipment with a similar or identical product). Time is a constraining 
factor during emergency replacements and it may not be possible to 
consider the full range of available options on the market, as a new 
product choice may take more time to install than is practical. The 
consideration of alternative product options is far more likely for 
planned replacements and installations in new construction.
    Additionally, Davis and Metcalf \89\ conducted an experiment 
demonstrating that the nature of the information available to consumers 
from EnergyGuide labels posted on air conditioning equipment results in 
an inefficient allocation of energy efficiency across households with 
different usage levels. Their findings indicate that households are 
likely to make decisions regarding the efficiency of the climate 
control equipment of their homes that do not result in the highest net 
present value for their specific usage pattern (i.e., their decision is 
based on imperfect information and, therefore, is not necessarily 
optimal).
---------------------------------------------------------------------------

    \89\ Davis, L.W., and G.E. Metcalf (2016): ``Does better 
information lead to better choices? Evidence from energy-efficiency 
labels,'' Journal of the Association of Environmental and Resource 
Economists, 3(3), 589-625. (Available at: www.journals.uchicago.edu/doi/full/10.1086/686252) (Last accessed May 1, 2023).
---------------------------------------------------------------------------

    In part because of the way information is presented, and in part 
because of the way consumers process information, there is also a 
market failure consisting of a systematic bias in the perception of 
equipment energy usage, which can affect consumer choices. Attari, 
Krantz, and Weber \90\ show that consumers tend to underestimate the 
energy use of large energy-intensive appliances, but overestimate the 
energy use of small appliances. Therefore, it is likely that consumers 
systematically underestimate the energy use associated with water 
heater, resulting in less cost-effective water heater purchases.
---------------------------------------------------------------------------

    \90\ Attari, S.Z., M.L. DeKay, C.I. Davidson, and W. Bruine de 
Bruin (2010): ``Public perceptions of energy consumption and 
savings.'' Proceedings of the National Academy of Sciences 107(37), 
16054-16059 (Available at: www.pnas.org/content/107/37/16054) (Last 
accessed May 1, 2023).
---------------------------------------------------------------------------

    These market failures affect a sizeable share of the consumer 
population. A study by Houde \91\ indicates that there is a significant 
subset of consumers that appear to purchase appliances without taking 
into account their energy efficiency and operating costs at all.
---------------------------------------------------------------------------

    \91\ Houde, S. (2018): ``How Consumers Respond to Environmental 
Certification and the Value of Energy Information,'' The RAND 
Journal of Economics, 49 (2), 453-477 (Available at: 
onlinelibrary.wiley.com/doi/full/10.1111/1756-2171.12231) (Last 
accessed May 1, 2023).
---------------------------------------------------------------------------

    Although consumer water heaters are predominantly installed in the

[[Page 49117]]

residential sector, some are also installed in commercial buildings 
(slightly less than 10 percent of projected shipments; see chapter 9 of 
the NOPR TSD). There are market failures relevant to consumer water 
heaters installed in commercial applications as well. It is often 
assumed that because commercial and industrial customers are businesses 
that have trained or experienced individuals making decisions regarding 
investments in cost-saving measures, some of the commonly observed 
market failures present in the general population of residential 
customers should not be as prevalent in a commercial setting. However, 
there are many characteristics of organizational structure and historic 
circumstance in commercial settings that can lead to underinvestment in 
energy efficiency.
    First, a recognized problem in commercial settings is the 
principal-agent problem, where the building owner (or building 
developer) selects the equipment and the tenant (or subsequent building 
owner) pays for energy costs.92 93 Indeed, more than a 
quarter of commercial buildings in the CBECS 2018 sample are occupied 
at least in part by a tenant, not the building owner (indicating that, 
in DOE's experience, the building owner likely is not responsible for 
paying energy costs). Additionally, some commercial buildings have 
multiple tenants. There are other similar misaligned incentives 
embedded in the organizational structure within a given firm or 
business that can impact the choice of a water heater. For example, if 
one department or individual within an organization is responsible for 
capital expenditures (and therefore equipment selection) while a 
separate department or individual is responsible for paying the energy 
bills, a market failure similar to the principal-agent problem can 
result.\94\ Additionally, managers may have other responsibilities and 
often have other incentives besides operating cost minimization, such 
as satisfying shareholder expectations, which can sometimes be focused 
on short-term returns.\95\ Decision-making related to commercial 
buildings is highly complex and involves gathering information from and 
for a variety of different market actors. It is common to see 
conflicting goals across various actors within the same organization as 
well as information asymmetries between market actors in the energy 
efficiency context in commercial building construction.\96\
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    \92\ Vernon, D., and Meier, A. (2012). ``Identification and 
quantification of principal-agent problems affecting energy 
efficiency investments and use decisions in the trucking industry,'' 
Energy Policy, 49, 266-273.
    \93\ Blum, H. and Sathaye, J. (2010). ``Quantitative Analysis of 
the Principal-Agent Problem in Commercial Buildings in the U.S.: 
Focus on Central Space Heating and Cooling,'' Lawrence Berkeley 
National Laboratory, LBNL-3557E. (Available at: escholarship.org/uc/item/6p1525mg) (Last accessed May 1, 2023).
    \94\ Prindle, B., Sathaye, J., Murtishaw, S., Crossley, D., 
Watt, G., Hughes, J., and de Visser, E. (2007). ``Quantifying the 
effects of market failures in the end-use of energy,'' Final Draft 
Report Prepared for International Energy Agency. (Available from 
International Energy Agency, Head of Publications Service, 9 rue de 
la Federation, 75739 Paris, Cedex 15 France).
    \95\ Bushee, B.J. (1998). ``The influence of institutional 
investors on myopic R&D investment behavior,'' Accounting Review, 
305-333. DeCanio, S.J. (1993). ``Barriers Within Firms to Energy 
Efficient Investments,'' Energy Policy, 21(9), 906-914. (explaining 
the connection between short-termism and underinvestment in energy 
efficiency).
    \96\ International Energy Agency (IEA). (2007). Mind the Gap: 
Quantifying Principal-Agent Problems in Energy Efficiency. OECD Pub. 
(Available at: www.iea.org/reports/mind-the-gap) (Last accessed May 
1, 2023).
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    Second, the nature of the organizational structure and design can 
influence priorities for capital budgeting, resulting in choices that 
do not necessarily maximize profitability.\97\ Even factors as simple 
as unmotivated staff or lack of priority-setting and/or a lack of a 
long-term energy strategy can have a sizable effect on the likelihood 
that an energy efficient investment will be undertaken.\98\ U.S. tax 
rules for commercial buildings may incentivize lower capital 
expenditures, since capital costs must be depreciated over many years, 
whereas operating costs can be fully deducted from taxable income or 
passed through directly to building tenants.\99\
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    \97\ DeCanio, S.J. (1994). ``Agency and control problems in US 
corporations: the case of energy-efficient investment projects,'' 
Journal of the Economics of Business, 1(1), 105-124.
    Stole, L.A., and Zwiebel, J. (1996). ``Organizational design and 
technology choice under intrafirm bargaining,'' The American 
Economic Review, 195-222.
    \98\ Rohdin, P., and Thollander, P. (2006). ``Barriers to and 
driving forces for energy efficiency in the non-energy intensive 
manufacturing industry in Sweden,'' Energy, 31(12), 1836-1844.
    Takahashi, M and Asano, H (2007). ``Energy Use Affected by 
Principal-Agent Problem in Japanese Commercial Office Space 
Leasing,'' In Quantifying the Effects of Market Failures in the End-
Use of Energy. American Council for an Energy-Efficient Economy. 
February 2007.
    Visser, E and Harmelink, M (2007). ``The Case of Energy Use in 
Commercial Offices in the Netherlands,'' In Quantifying the Effects 
of Market Failures in the End-Use of Energy. American Council for an 
Energy-Efficient Economy. February 2007.
    Bjorndalen, J. and Bugge, J. (2007). ``Market Barriers Related 
to Commercial Office Space Leasing in Norway,'' In Quantifying the 
Effects of Market Failures in the End-Use of Energy. American 
Council for an Energy-Efficient Economy. February 2007.
    Schleich, J. (2009). ``Barriers to energy efficiency: A 
comparison across the German commercial and services sector,'' 
Ecological Economics, 68(7), 2150-2159.
    Muthulingam, S., et al. (2013). ``Energy Efficiency in Small and 
Medium-Sized Manufacturing Firms,'' Manufacturing & Service 
Operations Management, 15(4), 596-612. (Finding that manager 
inattention contributed to the non-adoption of energy efficiency 
initiatives).
    Boyd, G.A., Curtis, E.M. (2014). ``Evidence of an `energy 
management gap' in US manufacturing: Spillovers from firm management 
practices to energy efficiency,'' Journal of Environmental Economics 
and Management, 68(3), 463-479.
    \99\ Lovins, A. (1992). Energy-Efficient Buildings: 
Institutional Barriers and Opportunities. (Available at: rmi.org/insight/energy-efficient-buildings-institutional-barriers-and-opportunities/) (Last accessed May 1, 2023).
    Fazzari, S.M. Hubbard, R.G., Petersen, B.C., Blinder, A.S., and 
Poterba, J. M. (1988). ``Financing constraints and corporate 
investment,'' Brookings Papers on Economic Activity, 1988(1), 141-
206.
    Cummins, J.G., Hassett, K.A., Hubbard, R.G., Hall, R.E., and 
Caballero, R.J. (1994). ``A reconsideration of investment behavior 
using tax reforms as natural experiments,'' Brookings Papers on 
Economic Activity, 1994(2), 1-74.
    DeCanio, S.J., and Watkins, W.E. (1998). ``Investment in energy 
efficiency: do the characteristics of firms matter?'' Review of 
Economics and Statistics, 80(1), 95-107.
    Hubbard R.G. and Kashyap A. (1992). ``Internal Net Worth and the 
Investment Process: An Application to U.S. Agriculture,'' Journal of 
Political Economy, 100, 506-534.
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    Third, there are asymmetric information and other potential market 
failures in financial markets in general, which can affect decisions by 
firms with regard to their choice among alternative investment options, 
with energy efficiency being one such option.\100\ Asymmetric 
information in financial markets is particularly pronounced with regard 
to energy efficiency investments.\101\ There is a dearth of information 
about risk and volatility related to energy efficiency investments, and 
energy efficiency investment metrics may not be as visible to 
investment managers,\102\ which can bias firms towards more certain or 
familiar options. This market failure results not because the returns 
from energy efficiency as an investment are inherently riskier, but 
because information about the risk itself tends

[[Page 49118]]

not to be available in the same way it is for other types of 
investment, like stocks or bonds. In some cases energy efficiency is 
not a formal investment category used by financial managers, and if 
there is a formal category for energy efficiency within the investment 
portfolio options assessed by financial managers, they are seen as 
weakly strategic and not seen as likely to increase competitive 
advantage.\103\ This information asymmetry extends to commercial 
investors, lenders, and real-estate financing, which is biased against 
new and perhaps unfamiliar technology (even though it may be 
economically beneficial).\104\ Another market failure known as the 
first-mover disadvantage can exacerbate this bias against adopting new 
technologies, as the successful integration of new technology in a 
particular context by one actor generates information about cost-
savings, and other actors in the market can then benefit from that 
information by following suit; yet because the first to adopt a new 
technology bears the risk but cannot keep to themselves all the 
informational benefits, firms may inefficiently underinvest in new 
technologies.\105\
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    \101\ Mills, E., Kromer, S., Weiss, G., and Mathew, P.A. (2006). 
``From volatility to value: analysing and managing financial and 
performance risk in energy savings projects,'' Energy Policy, 34(2), 
188-199.
    Jollands, N., Waide, P., Ellis, M., Onoda, T., Laustsen, J., 
Tanaka, K., and Meier, A. (2010). ``The 25 IEA energy efficiency 
policy recommendations to the G8 Gleneagles Plan of Action,'' Energy 
Policy, 38(11), 6409-6418.
    \102\ Reed, J.H., Johnson, K., Riggert, J., and Oh, A. D. 
(2004). ``Who plays and who decides: The structure and operation of 
the commercial building market,'' U.S. Department of Energy Office 
of Building Technology, State and Community Programs. (Available at: 
www1.eere.energy.gov/buildings/publications/pdfs/commercial_initiative/who_plays_who_decides.pdf) (Last accessed May 
1, 2023).
    \103\ Cooremans, C. (2012). ``Investment in energy efficiency: 
do the characteristics of investments matter?'' Energy Efficiency, 
5(4), 497-518.
    \104\ Lovins 1992, op. cit.
    The Atmospheric Fund. (2017). Money on the table: Why investors 
miss out on the energy efficiency market. (Available at: taf.ca/
publications/money-table-investors-energy-efficiency-market/) (Last 
accessed May 1, 2023).
    \105\ Blumstein, C. and Taylor, M. (2013). Rethinking the 
Energy-Efficiency Gap: Producers, Intermediaries, and Innovation. 
Energy Institute at Haas Working Paper 243. (Available at: 
haas.berkeley.edu/wp-content/uploads/WP243.pdf) (Last accessed May 
1, 2023).
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    In sum, the commercial and industrial sectors face many market 
failures that can result in an under-investment in energy efficiency. 
This means that discount rates implied by hurdle rates \106\ and 
required payback periods of many firms are higher than the appropriate 
cost of capital for the investment.\107\ The preceding arguments for 
the existence of market failures in the commercial and industrial 
sectors are corroborated by empirical evidence. One study in particular 
showed evidence of substantial gains in energy efficiency that could 
have been achieved without negative repercussions on profitability, but 
the investments had not been undertaken by firms.\108\ The study found 
that multiple organizational and institutional factors caused firms to 
require shorter payback periods and higher returns than the cost of 
capital for alternative investments of similar risk. Another study 
demonstrated similar results with firms requiring very short payback 
periods of 1-2 years in order to adopt energy-saving projects, implying 
hurdle rates of 50 to 100 percent, despite the potential economic 
benefits.\109\ A number of other case studies similarly demonstrate the 
existence of market failures preventing the adoption of energy-
efficient technologies in a variety of commercial sectors around the 
world, including office buildings,\110\ supermarkets,\111\ and the 
electric motor market.\112\
---------------------------------------------------------------------------

    \106\ A hurdle rate is the minimum rate of return on a project 
or investment required by an organization or investor. It is 
determined by assessing capital costs, operating costs, and an 
estimate of risks and opportunities.
    \107\ DeCanio 1994, op. cit.
    \108\ DeCanio, S.J. (1998). ``The Efficiency Paradox: 
Bureaucratic and Organizational Barriers to Profitable Energy-Saving 
Investments,'' Energy Policy, 26(5), 441-454.
    \109\ Andersen, S.T., and Newell, R.G. (2004). ``Information 
programs for technology adoption: the case of energy-efficiency 
audits,'' Resource and Energy Economics, 26, 27-50.
    \110\ Prindle 2007, op. cit.
    Howarth, R.B., Haddad, B.M., and Paton, B. (2000). ``The 
economics of energy efficiency: insights from voluntary 
participation programs,'' Energy Policy, 28, 477-486.
    \111\ Klemick, H., Kopits, E., Wolverton, A. (2017). ``Potential 
Barriers to Improving Energy Efficiency in Commercial Buildings: The 
Case of Supermarket Refrigeration,'' Journal of Benefit-Cost 
Analysis, 8(1), 115-145.
    \112\ de Almeida, E.L.F. (1998). ``Energy efficiency and the 
limits of market forces: The example of the electric motor market in 
France'', Energy Policy, 26(8), 643-653.
    Xenergy, Inc. (1998). United States Industrial Electric Motor 
Systems Market Opportunity Assessment. (Available at: 
www.energy.gov/sites/default/files/2014/04/f15/mtrmkt.pdf) (Last 
accessed April 1, 2023).
---------------------------------------------------------------------------

    The existence of market failures in the residential and commercial 
sectors is well supported by the economics literature and by a number 
of case studies. If DOE developed an efficiency distribution that 
assigned water heater efficiency in the no-new-standards case solely 
according to energy use or economic considerations such as life-cycle 
cost or payback period, the resulting distribution of efficiencies 
within the building sample would not reflect any of the market failures 
or behavioral factors above. DOE thus concludes such a distribution 
would not be representative of the water heater market. Further, even 
if a specific household/building/organization is not subject to the 
market failures above, the purchasing decision of water heater 
efficiency can be highly complex and influenced by a number of factors 
not captured by the building characteristics available in the RECS or 
CBECS samples. These factors can lead to households or building owners 
choosing a water heater efficiency that deviates from the efficiency 
predicted using only energy use or economic considerations such as 
life-cycle cost or payback period (as calculated using the information 
from RECS 2015 or CBECS 2018). However, DOE intends to investigate this 
issue further, and it welcomes suggestions as to how it might improve 
its assignment of water heater efficiency in its analyses.
    DOE further notes that, in the case of gas-fired storage and 
electric storage water heaters (<=55 gal), the distribution of 
efficiency in the current market is heavily weighted toward baseline 
efficiency or efficiency at EL 1. Most consumers are assigned EL 0 or 
EL 1 in accordance with the market data. As a result, any variation to 
DOE's efficiency assignment methodology will not produce substantially 
differing results than presented in this NOPR, as most consumers will 
continue to be assigned the same efficiency regardless of the details 
of the methodology.
    In response to the Gas Association Commenters regarding the 
disclosure of results, DOE reiterates that the full results of all 
trials in the LCC are made available to all interested parties. These 
results include the most economically beneficial individual LCC 
outcomes and highest net cost individual LCC outcomes.
9. Accounting for Product Switching Under Potential Standards
    For the preliminary analysis, DOE did not account for the product 
switching under potential standards. For this NOPR, DOE maintained the 
same approach and did not include any product switching in its 
analysis. DOE assumes that any product switching as a result of the 
proposed standards is likely to be minimal.
    In the hypothetical case of a consumer switching from a gas-fired 
water heater to an electric storage water heater, there are likely 
additional installation costs necessary to add an electrical 
connection. In some cases, it may be possible to install a 120 V heat 
pump storage water heater with minimal additional installation costs, 
particularly if there is a standard electrical outlet nearby already. 
In most cases, however, a standard 240 V electrical storage water 
heater would be installed. To do so, the consumer would need to add a 
240 V circuit to either an existing electrical panel or upgrade the 
entire panel. Panel upgrade costs are significant and can be 
approximately $1,000-$2,000 for 100 to 200 amp

[[Page 49119]]

electrical panels.\113\ Older homes and homes with gas-fired space 
heating (e.g., homes with gas furnaces) are more likely to need an 
electrical panel upgrade in order to install an electric storage water 
heater, given the relatively modest electrical needs of the home at the 
time of construction. Given the significant additional installation 
costs, DOE estimates that very few consumers would switch from gas-
fired water heaters to electric storage water heaters as a result of an 
energy conservation standard, especially at the proposed standard at 
TSL 2. This is especially true in the case of an emergency replacement 
where time is a critical factor. When a water heater fails, consumers 
typically have limited time to make a decision on which new water 
heater the consumer is going to choose to purchase and rely upon 
replacing the water heater with one that is similar to the one that 
failed. Consumers are unlikely to invest in switching fuels to water 
heater that utilizes a different fuel source in the emergency 
replacement scenario.
---------------------------------------------------------------------------

    \113\ For example, see: www.homeadvisor.com/cost/electrical/upgrade-an-electrical-panel/#upgrade (last accessed May 1, 2023).
---------------------------------------------------------------------------

    In the hypothetical case of a consumer switching from an electric 
storage water heater to a gas-fired water heater, there are, similarly, 
additional installation costs necessary to add a gas connection. Based 
on RECS 2020, DOE estimates that only 25 percent of homes with an 
electric storage water heater currently use natural gas and an 
additional 25 percent reported that natural gas is available in the 
neighborhood. Therefore, the option to switch to a gas-fired water 
heater is not available to half of consumers and for another 25 
percent, it would be very expensive to bring in a natural gas 
connection from the street level to the home. An additional 10 percent 
of homes use LPG, but the fuel costs are much more expensive than 
natural gas and requires significant gas line connection upgrades to 
connect the LPG tank to the water heater. Even in homes with an 
existing gas connection, new venting would need to be installed for 
either gas-fired storage water heaters or gas-fired instantaneous water 
heaters. The average total installed costs for either gas-fired option, 
including all the necessary venting and additional gas lines in the 
home, are larger than replacing the electrical storage water heater 
with a standards-compliant model (at the proposed level). As a result, 
DOE estimates that very few consumers would switch from electric 
storage water heaters to gas-fired water heaters as a result of an 
energy conservation standard, particularly in the case of an emergency 
replacement.
    Lastly, in the hypothetical case of a consumer switching from a 
gas-fired storage water heater to a gas-fired instantaneous water 
heater or vice-versa, there are additional installation costs necessary 
as well. The vast majority of gas-fired storage water heaters utilize 
non-condensing technology that utilizes Category I type B metal vent 
material, whereas switching to gas-fired instantaneous water heaters 
would require condensing technology that utilizes Category IV venting 
material at the efficiency levels proposed in this rule. Replacing the 
venting system would result in significant installation costs. 
Furthermore, given the significantly higher Btu/h input required for 
instantaneous water heaters, it may be necessary to upgrade the gas 
line feeding the water heater to a larger diameter. This is especially 
true if the line also services a gas furnace. Upgrading a gas line 
could add approximately $1,000 in extra costs or more. For the proposed 
standards for gas-fired storage water heaters and gas-fired 
instantaneous water heaters, the difference in installation costs 
between the baseline equipment and higher efficiency option is 
typically much less than the potential switching costs. As a result, 
DOE estimates that very few consumers would switch from gas-fired 
storage water heaters to gas-fired instantaneous water heaters or vice 
versa as a result of an energy conservation standard, particularly in 
the case of an emergency replacement.
    NYSERDA recommends DOE include a Discrete Choice Model (DCM) to 
understand technology switching in the LCC. DCMs would help predict the 
likelihood of a customer choosing one product over another, based on 
their preferences (such as price, first cost, or life cycle cost). 
(NYSERDA, No.35 at p. 5) As noted previously, DOE did not include 
product switching in its analysis as this is likely to be a minimal 
effect. As a result, DOE did not require a DCM to model this switching 
for the LCC analysis. As described in the shipments analysis 
(IV.G.1.a), DOE used the LCC spreadsheet to estimate potential 
shipments impacts due to downsizing of electric storage water heaters 
in the various proposed TSLs based on a consumer choice model.
    PHHC stated that in the case of switching from gas to electric 
resistance, the additional electrical costs would add significantly to 
the installation cost. (PHCC, No.40 at p. 3) DOE agrees that when 
switching from gas to electric storage water heaters, the additional 
electrical costs could be significant and include replacement of the 
entire electrical panel. As a result, and as noted previously, DOE did 
not include product switching in its analysis as this is likely to be a 
minimal effect.
    Rheem stated that if DOE were to amend the electric storage water 
heater standards to a level that would require heat pump technology for 
lowboy water heaters, replacements would likely be electric 
instantaneous water heaters, as gas-fired is not an option due to 
venting and heat pump technology cannot fit in the confined space. 
Rheem stated that electric instantaneous water heaters use electric 
resistance technology and have comparable UEF values to lowboy water 
heaters, so DOE won't realize actual efficiency gains for these types 
of water heaters. Further, Rheem stated that replacing a lowboy water 
heater with an electric instantaneous water heater would likely require 
a costly electrical panel upgrade and significantly increase energy use 
during peak grid energy use times, and both issues will significantly 
increase the cost of water heating for the low-income households that 
typically rely on lowboy water heaters. (Rheem, No. 45 at p. 7)
    DOE agrees that replacing small electric resistance water heaters 
(including lowboy water heaters) can be challenging for standards cases 
that would require a heat pump water heater standard. DOE notes that 
the proposed standard does not require an efficiency equivalent to a 
heat pump water heater for very small and low draw pattern electric 
storage water heaters below 35 gallons, which is the majority of the 
lowboy market. As described in the shipments analysis (IV.G.1.a), DOE 
used took into account various consumer choice options for lowboy water 
heaters and other challenging installation situations, including using 
a smaller electric storage water heater and a ``booster'' instantaneous 
water heater.\114\
---------------------------------------------------------------------------

    \114\ See Rheem's booster instantaneous water heater, which can 
increase the availability of hot water for storage tank water 
heaters: https://www.rheem.com/innovations/innovation_residential/water-heater-booster/.
---------------------------------------------------------------------------

    DOE welcomes comment on the likelihood of consumers switching 
products in response to amended standards.
10. Payback Period Analysis
    The payback period is the amount of time (expressed in years) it 
takes the consumer to recover the additional installed cost of more-
efficient products, compared to baseline products, through energy cost 
savings. Payback periods that exceed the life of the product mean

[[Page 49120]]

that the increased total installed cost is not recovered in reduced 
operating expenses.
    The inputs to the PBP calculation for each efficiency level are the 
change in total installed cost of the product and the change in the 
first-year annual operating expenditures relative to the baseline. DOE 
refers to this as a ``simple PBP'' because it does not consider changes 
over time in operating cost savings. The PBP calculation uses the same 
inputs as the LCC analysis when deriving first-year operating costs.
    As noted previously, EPCA establishes a rebuttable presumption that 
a standard is economically justified if the Secretary finds that the 
additional cost to the consumer of purchasing a product complying with 
an energy conservation standard level will be less than three times the 
value of the first year's energy savings resulting from the standard, 
as calculated under the applicable test procedure. (42 U.S.C. 
6295(o)(2)(B)(iii)) For each considered efficiency level, DOE 
determined the value of the first year's energy savings by calculating 
the energy savings in accordance with the applicable DOE test 
procedure, and multiplying those savings by the average energy price 
projection for the year in which compliance with the amended standards 
would be required.

G. Shipments Analysis

    DOE uses projections of annual product shipments to calculate the 
national impacts of potential amended or new energy conservation 
standards on energy use, NPV, and future manufacturer cash flows.\115\ 
The shipments model takes an accounting approach, tracking market 
shares of each product class and the vintage of units in the stock. 
Stock accounting uses product shipments as inputs to estimate the age 
distribution of in-service product stocks for all years. The age 
distribution of in-service product stocks is a key input to 
calculations of both the NES and NPV, because operating costs for any 
year depend on the age distribution of the stock.
---------------------------------------------------------------------------

    \115\ DOE uses data on manufacturer shipments as a proxy for 
national sales, as aggregate data on sales are lacking. In general, 
one would expect a close correspondence between shipments and sales.
---------------------------------------------------------------------------

    DOE developed shipment projections based on historical data and an 
analysis of key market drivers for each product. DOE estimated consumer 
water heater shipments by projecting shipments in three market 
segments: (1) replacement of existing consumer water heaters; (2) new 
housing; and (3) new owners in buildings that did not previously have a 
consumer water heater or existing water heater owners that are adding 
an additional consumer water heater.\116\
---------------------------------------------------------------------------

    \116\ The new owners primarily consist of households that add or 
switch to a different water heater option during a major remodel. 
Because DOE calculates new owners as the residual between its 
shipments model compared to historical shipments, new owners also 
include shipments that switch away from water heater product class 
to another.
---------------------------------------------------------------------------

    To project water heater replacement shipments, DOE developed 
retirement functions from water heater lifetime estimates and applied 
them to the existing products in the housing stock, which are tracked 
by vintage. DOE calculated replacement shipments using historical 
shipments and the lifetime estimates. Annual historical shipments 
sources are: (1) Appliance Magazine; \117\ (2) Air-Conditioning, 
Heating, and Refrigeration Institute (AHRI) website; \118\ (3) multiple 
AHRI data submittals; \119\ (4) BRG Building Solutions 2022 report; (5) 
ENERGY STAR unit shipments data; \120\ (6) Oil Heating Magazine; \121\ 
and 2010 Heating Products Final Rule. In addition, DOE adjusted 
replacement shipments by taking into account demolitions, using the 
estimated changes to the housing stock from AEO2023.
---------------------------------------------------------------------------

    \117\ Appliance Magazine. Appliance Historical Statistical 
Review: 1954-2012. 2014. UBM Canon.
    \118\ Air-Conditioning, Heating, and Refrigeration Institute. 
Water Heaters Historical Data. (Available at: www.ahrinet.org/resources/statistics/historical-data/residential-storage-water-heaters-historical-data) (Last accessed May 1, 2023).
    \119\ AHRI. Confidential Instantaneous Gas-fired Water Heater 
Shipments Data from 2004-2007 to LBNL. March 3, 2008; AHRI. Oil-
fired Storage Water Heater (30/32 gallons) Shipments Data provided 
to DOE. 2008.
    \120\ ENERGY STAR. Unit Shipments data 2010-2021. multiple 
reports. (Available at: www.energystar.gov/partner_resources/products_partner_resources/brand_owner_resources/unit_shipment_data) 
(Last accessed May 1, 2023).
    \121\ Oil Heating Magazine. Merchandising News: Monthly Data on 
Water Heaters Installed by Dealers 1997-2007. 2007.
---------------------------------------------------------------------------

    To project shipments to the new housing market, DOE used the 
AEO2023 housing starts and commercial building floor space projections 
to estimate future numbers of new homes and commercial building floor 
space. DOE then used data from U.S. Census Characteristics of New 
Housing, 122 123 Home Innovation Research Labs Annual 
Builder Practices Survey,\124\ RECS 2020, AHS 2021, and CBECS 2018 to 
estimate new construction water heater saturations by consumer water 
heater product class.
---------------------------------------------------------------------------

    \122\ U.S. Census. Characteristics of New Housing from 1999-2022 
(Available at: www.census.gov/construction/chars/) (Last accessed 
May 1, 2023).
    \123\ U.S. Census. Characteristics of New Housing (Multi-Family 
Units) from 1973-2022 (Available at: www.census.gov/construction/chars/mfu.html) (Last accessed May 1, 2023).
    \124\ Home Innovation Research Labs (independent subsidiary of 
the National Association of Home Builders (``NAHB''). Annual Builder 
Practices Survey (2015-2019) (Available at: www.homeinnovation.com/trends_and_reports/data/new_construction) (Last accessed May 1, 
2023).
---------------------------------------------------------------------------

    DOE estimated shipments to the new owners market based on the 
residual shipments from the calculated replacement and new construction 
shipments compared to historical shipments in the last 5 years (2018-
2022 for this NOPR). DOE compared this with data from Decision 
Analysts' 2002 to 2022 American Home Comfort Study \125\ and 2022 BRG 
data, which showed similar historical fractions of new owners. DOE 
assumed that the new owner fraction in 2030 would be equal to the 10-
year average of the historical data (2013-2022) and then decrease to 
zero by the end of the analysis period (2059). If the resulting 
fraction of new owners is negative, DOE assumed that it was primarily 
due to equipment switching or non-replacement and added this number to 
replacements (thus reducing the replacements value).
---------------------------------------------------------------------------

    \125\ Decision Analysts, 2002, 2004, 2006, 2008, 2010, 2013, 
2016, 2019, and 2022 American Home Comfort Study (Available at: 
www.decisionanalyst.com/Syndicated/HomeComfort/) (Last accessed May 
1, 2023).
---------------------------------------------------------------------------

    BWC stated that there are several elements from the 2010 Final Rule 
that never materialized as DOE expected following its effective date in 
2015. Given this, BWC recommend DOE perform a lookback analysis to 
better understand why things didn't materialize as expected based on 
the 2010 Final Rule. BWC stated that this will allow the current 
rulemakings process and analysis to be better informed, adjusted 
appropriately, and ideally be more representative of the anticipated 
outcome. (BWC, No.32 at p. 6) BWC did not clarify which elements of the 
2010 final rule did not materialize, but DOE believes this comment 
mainly relates to the lower fraction of shipments of gas-fired and 
electric storage water heaters above 55 gallons after the 2015 
standards, relative to DOE's projection. For this analysis, DOE 
examined why the shipments did not materialize as expected in the 2010 
Final Rule analysis, which is included as part of appendix 9A of the 
NOPR TSD. This lookback analysis was then used to better estimate 
projected shipments by water heater size for the present analysis. 
Based on this analysis, which showed a significant number of consumers 
opted to install one or more smaller water heaters, DOE developed the 
consumer choice model for estimating the impacts of proposed

[[Page 49121]]

standards on shipments as shown in IV.G.1.a.
    BWC is concerned with the projected water heater shipments by 
product category in the preliminary analysis, as it shows a significant 
increase in gas-fired instantaneous water heaters shipments. They 
stated that these projections do not appear to account for how state 
and local policies will impact the shipments of different water heater 
types; i.e., California, one of the largest markets for gas-fired 
instantaneous water heaters, has modified Title 24, its building code, 
to disincentivize their use. They stated that this is also true of 
various pieces of state legislation and proposed actions by the 
California Air Resources Board, as well as several Air Districts (e.g., 
South Coast Air Quality Management District; Bay Area Air Quality 
Management District). (BWC, No. 32 at p.5) AHRI requested that DOE 
evaluate the impact of regional efforts to bring gas water heater 
emissions below ultra-low NOX levels. (AHRI, No. 31 at pp. 
20-21)
    For the NOPR, DOE accounted for the 2022 update to Title 24 in 
California \126\ and also the decision of the California Public 
Utilities Commission to entirely eliminate ratepayer subsidies for the 
extension of new gas lines beginning in July 2023. Together, these 
policies are expected to lead to the phase-out of gas-fired water 
heaters in new single-family homes. The California Air Resources Board 
has adopted a 2022 State Strategy for the State Implementation Plan 
that would effectively ban sales of new gas-fired space heaters and 
water heaters beginning in 2030.\127\ However, because a final decision 
on a rule would not happen until 2025, DOE did not include this policy 
in its analysis for the NOPR.
---------------------------------------------------------------------------

    \126\ The 2022 update includes heat pumps as a performance 
standard baseline for water or space heating in single-family homes, 
and space heating in multi-family homes. Builders will need to 
either include one high-efficiency heat pump in new constructions or 
subject those buildings to more stringent energy efficiency 
standards.
    \127\ https://ww2.arb.ca.gov/resources/documents/2022-state-
strategy-state-implementation-plan-2022-state-sip-
strategy#:~:text=The%202022%20State%20SIP%20Strategy,all%20nonattainm
ent%20areas%20across%20California.
---------------------------------------------------------------------------

    AHRI, Rheem and GEA are concerned with the shipment projections 
that DOE has outlined in the preliminary TSD because of the lack of 
consideration related to the ongoing decarbonization and 
electrification efforts. They stated that many states and cities are 
moving towards a ``ban'' on gas products altogether (e.g., California 
Title 24, CARB, SCAQMD, BAAQMD, and New York City) that is likely to 
impact water heater shipments by product class, efficiency, and 
especially fuel type, and yet DOE's analysis shows a steady increase in 
gas appliance sales. AHRI stated that it does not appear that the 
Department took these policies into account when performing their 
analysis. (AHRI, No. 42 at p. 3; GEA, No. 46 at p. 1; Rheem, No. 45 at 
p. 3) NYSERDA also stated that DOE's shipment analysis is not 
predicting an appropriate future increase in electric water heater 
sales and disagrees with DOE's analysis showing the number of electric 
water heaters, including HPWHs, remaining steady in DOE's predictions. 
NYSERDA stated that New York is among many jurisdictions with deep 
decarbonization or carbon neutral buildings goals, with timelines 
ranging from 2032 to 2050 and it expects that these goals will 
dramatically increase the market for electric water heaters while 
decreasing overall demand for fossil fuel water heaters. NYSERDA 
recommends that DOE reflect existing policies that are heavily pushing 
electrification of space and water heating and increase the number of 
electric WHs projected to be shipped between approximately 2030 and 
2050. (NYSERDA, No. 35 at pp.2-3) EEI suggested that DOE complete a 
sensitivity analysis based on successfully establishing a zero-carbon 
energy grid by 2035. (EEI, No. 31 at pp. 48-49)
    For the preliminary analysis, assumptions regarding future policies 
encouraging electrification of households and electric water heating 
were speculative at that time, so such policies were not incorporated 
into the shipments projection.
    DOE agrees that ongoing electrification policies at the Federal, 
State, and local levels are likely to encourage installation of 
electric water heaters in new homes and adoption of electric water 
heaters in homes that currently use gas-fired water heaters. For 
example, the Inflation Reduction Act includes incentives for heat pump 
water heaters and electrical panel upgrades. However, there are many 
uncertainties about the timing and impact of these policies that make 
it difficult to fully account for their likely impact on gas and 
electric water heater market shares in the time frame for this analysis 
(i.e., 2030 through 2059). Nonetheless, DOE has modified some of its 
projections to attempt to account for impacts that seem most likely in 
the relevant time frame. The assumptions are described in chapter 9 and 
appendix 9A of the NOPR TSD. The changes result in a decrease in gas-
fired storage and instantaneous water heater shipments in the no-new-
standards case in 2030 compared to the preliminary analysis. DOE 
acknowledges that electrification policies may result in a larger 
decrease in shipments of gas-fired water heaters than projected in this 
NOPR, especially if stronger policies are adopted in coming years. 
However, this would occur in the no-new amended standards case and thus 
would only reduce the energy savings estimated in this proposed rule. 
For example, if incentives and rebates shifted 5 percent of shipments 
in the no-new amended standards case from gas-fired storage water 
heaters to heat pump electric storage water heaters, then the energy 
savings estimated for gas-fired storage water heaters in this proposed 
rule would decline by approximately 5 percent. The estimated consumer 
impacts are likely to be similar, however, except that the percentage 
of consumers with no impact at a given efficiency level would increase. 
DOE notes that the economic justification for the proposed rule would 
not change if DOE included the impact of incentives and rebates in the 
no-new-standards case, even if the absolute magnitude of the savings 
were to decline.
    DOE requests comments on its approach for taking into account 
electrification efforts in its shipments analysis.
1. Impact of Potential Standards on Shipments
a. Impact of Consumer Choice for Electric Storage Water Heaters
    DOE applied a consumer choice model to estimate the impact on 
electric storage water heaters shipments in the case of a heat pump 
water heater standard. As noted previously (IV.F.9), DOE did not 
include other product switching (e.g., using different fuels) in its 
analysis as this is likely to be a minimal effect. This is especially 
true in the case of an emergency replacement.
    DOE accounted for the potential of consumers selecting one or more 
smaller electric storage water heaters with or without a ``booster'' 
instantaneous water heater instead of replacing a larger electric 
storage water heater with a heat pump water heater.\128\ DOE analyzed 
two main scenarios for a heat pump standard: (1) When electric storage 
water heaters, >=20 gal and <=55 gal, excluding small ESWHs could 
potentially downsize to the small electric storage water heater product 
class, due to a heat pump standard to electric storage water heaters, 
>=20 gal

[[Page 49122]]

and <=55 gal, excluding small ESWHs only; (2) Heat pump water heater 
standard for all ESWH product classes, where ESWHs could potentially 
downsize to very small water heaters. DOE identified households from 
the electric consumer water heater sample that might downsize at each 
of the considered standard levels based on water heater sizing criteria 
and matching to the different consumer choice options that would result 
in no loss of utility. DOE assigned an effective volume and draw 
pattern to sampled consumer water heaters based on data from RECS 2015 
and CBECS 2018. DOE selected the households or buildings that would 
downsize based on the fact that the consumer would have a financial 
incentive to downsize in the short term (e.g., lower first cost), even 
though in some cases downsizing might not be advantageous in the long 
run compared to installing a heat pump water heater. Table IV.28 and 
Table IV.29 show the resulting estimated shipment market share impacted 
for each scenario.
---------------------------------------------------------------------------

    \128\ See Rheem's booster instantaneous water heater, which can 
increase the availability of hot water for storage tank water 
heaters: https://www.rheem.com/innovations/innovation_residential/water-heater-booster/.

                     Table IV.28--Consumer Choice Results for Electric Storage Water Heaters
  [Assuming heat pump standard for electric storage water heaters, >=20 gal and <=55 gal, excluding small ESWHs
                                                      only]
----------------------------------------------------------------------------------------------------------------
                                                            Efficiency level, market share impacted (%)
             Consumer choice options             ---------------------------------------------------------------
                                                         0               1               2               3
----------------------------------------------------------------------------------------------------------------
Not Switching...................................           100.0            78.2            78.5            75.3
Small ESWH......................................             0.0            11.4            11.4            13.3
Small ESWH + Booster............................             0.0             7.7             7.5             8.2
Two Small ESWH..................................             0.0             2.8             2.6             3.2
----------------------------------------------------------------------------------------------------------------


                     Table IV.29--Consumer Choice Results for Electric Storage Water Heaters
               [Assuming heat pump standard for all electric storage water heater product classes]
----------------------------------------------------------------------------------------------------------------
                                                            Efficiency level, market share impacted (%)
             Consumer choice options             ---------------------------------------------------------------
                                                         0               1               2               3
----------------------------------------------------------------------------------------------------------------
              Small Electric Storage Water Heaters, =20 gal and <=35 gal and FHR <51 gal
----------------------------------------------------------------------------------------------------------------
Not Switching...................................           100.0            23.0  ..............  ..............
Very Small ESWH + One Booster...................             0.0            74.1  ..............  ..............
Two Very Small ESWH.............................             0.0             2.8  ..............  ..............
Two Very Small ESWH + One Booster...............             0.0             0.1  ..............  ..............
----------------------------------------------------------------------------------------------------------------
             Electric Storage Water Heaters, =20 gal and <=55 gal, excluding Small ESWHs
----------------------------------------------------------------------------------------------------------------
Not Switching...................................           100.0            90.4            90.6            89.4
Very Small ESWH + One Booster...................             0.0             4.7             4.7             5.5
Two Very Small ESWH.............................             0.0             3.2             3.1             3.4
Two Very Small ESWH + One Booster...............             0.0             1.6             1.5             1.8
----------------------------------------------------------------------------------------------------------------

    The shipments model considers the switching that might occur in 
each year of the analysis period (2030-2059). To do so, DOE estimated 
the switching in the first year of the analysis period (2030), using 
data on willingness to pay, in the LCC analysis and derived trends from 
2030 to 2059. The shipments model also tracks the number of additional 
consumer water heaters shipped in each year. See appendix 9A of this 
NOPR TSD for further details regarding how DOE estimated switching 
between various electric water heater options.
b. Impact of Repair vs. Replace
    For this NOPR, DOE estimated a fraction of consumer water heater 
replacement installations that choose to repair their equipment, rather 
than replace their equipment in the new standards case. The approach 
captures not only a decrease in consumer water heater replacement 
shipments, but also the energy use from continuing to use the existing 
consumer water heater and the cost of the repair. DOE assumes that the 
demand for water heating is inelastic and, therefore, that no household 
or commercial building will forgo either repairing or replacing their 
equipment (either with a new consumer water heater or a suitable water 
heating alternative).
    For details on DOE's shipments analysis, consumer choice and the 
repair option, see chapter 9 of the final rule TSD.

H. National Impact Analysis

    The NIA assesses the national energy savings (``NES'') and the NPV 
from a national perspective of total consumer costs and savings that 
would be expected to result from new or amended standards at specific 
efficiency levels.\129\ (``Consumer'' in this context refers to 
consumers of the product being regulated.) DOE calculates the NES and 
NPV for the potential standard levels considered based on projections 
of annual product shipments, along with the annual energy consumption 
and total installed cost data from the energy use and LCC analyses. For 
the present analysis, DOE projected the energy savings, operating cost 
savings, product costs, and NPV of consumer benefits over the lifetime 
of consumer water heaters sold from 2030 through 2059.
---------------------------------------------------------------------------

    \129\ The NIA accounts for impacts in the 50 states and U.S. 
territories.
---------------------------------------------------------------------------

    DOE evaluates the impacts of new or amended standards by comparing 
a case without such standards with standards-case projections. The no-
new-standards case characterizes energy use and consumer costs for each 
product class in the absence of new or amended energy conservation 
standards. For this projection, DOE considers historical trends in 
efficiency and various forces that are likely to affect the mix of 
efficiencies over time. DOE compares

[[Page 49123]]

the no-new-standards case with projections characterizing the market 
for each product class if DOE adopted new or amended standards at 
specific energy efficiency levels (i.e., the TSLs or standards cases) 
for that class. For the standards cases, DOE considers how a given 
standard would likely affect the market shares of products with 
efficiencies greater than the standard.
    DOE uses a spreadsheet model to calculate the energy savings and 
the national consumer costs and savings from each TSL. Interested 
parties can review DOE's analyses by changing various input quantities 
within the spreadsheet. The NIA spreadsheet model uses typical values 
(as opposed to probability distributions) as inputs.
    Table IV.29 summarizes the inputs and methods DOE used for the NIA 
analysis for the NOPR. Discussion of these inputs and methods follows 
the table. See chapter 10 of the NOPR TSD for further details.

Table IV--Summary of Inputs and Methods for the National Impact Analysis
------------------------------------------------------------------------
            Inputs                               Method
------------------------------------------------------------------------
Shipments....................  Annual shipments from shipments model.
Compliance Date of Standard..  2030.
Efficiency Trends............  No-new-standards case: Based on
                                historical data.
                               Standards cases: Roll-up in the
                                compliance year and then DOE estimated
                                growth in shipment-weighted efficiency
                                in all the standards cases.
Annual Energy Consumption per  Annual weighted-average values are a
 Unit.                          function of energy use at each TSL.
Total Installed Cost per Unit  Annual weighted-average values are a
                                function of cost at each TSL.
                               Incorporates projection of future product
                                prices based on historical data.
Annual Energy Cost per Unit..  Annual weighted-average values as a
                                function of the annual energy
                                consumption per unit and energy prices.
Repair and Maintenance Cost    Annual values do not change with
 per Unit.                      efficiency level.
Energy Price Trends..........  AEO2023 projections (to 2050) and
                                extrapolation thereafter.
Energy Site-to-Primary and     A time-series conversion factor based on
 FFC Conversion.                AEO2023.
Discount Rate................  3 percent and 7 percent.
Present Year.................  2023.
------------------------------------------------------------------------

    NEEA, ACEEE, and NWPCC stated that DOE's NIA and NPV results align 
with NEEA's research and experience that HPWHs and improved gas water 
heaters are cost-effective and deliver significant benefits to 
consumers. (NEEA, ACEEE, and NWPCC, No. 47 at p. 3)
1. Product Efficiency Trends
    A key component of the NIA is the trend in energy efficiency 
projected for the no-new-standards case and each of the standards 
cases. Section IV.F.8 of this document describes how DOE developed an 
energy efficiency distribution for the no-new-standards case (which 
yields a shipment-weighted average efficiency) for each of the 
considered product classes for the year of anticipated compliance with 
an amended or new standard. To project the trend in efficiency absent 
amended standards for consumer water heaters over the entire shipments 
projection period, DOE used available historical shipments data and 
manufacturer input. The approach is further described in chapter 10 of 
the NOPR TSD.
    For the standards cases, DOE used a ``roll-up'' scenario to 
establish the shipment-weighted efficiency for the year that standards 
are assumed to become effective (2030). In this scenario, the market 
shares of products in the no-new-standards case that do not meet the 
standard under consideration would ``roll up'' to meet the new standard 
level, and the market share of products above the standard would remain 
unchanged.
    To develop standards case efficiency trends after 2030, DOE used 
historical shipment data and on current consumer water heater model 
availability by efficiency level (see chapter 8). DOE estimated growth 
in shipment-weighted efficiency by assuming that the implementation of 
ENERGY STAR's performance criteria and other incentives would gradually 
increase the market shares of higher efficiency water heaters meeting 
ENERGY STAR[supreg] requirements such as EL 3 and above for gas-fired 
storage water heaters, EL 2 and above for electric storage water 
heaters (>=20 gal Veff <=55 gal), and EL 1 and above for 
gas-fired instantaneous water heaters. DOE also took into account 
increased incentives for higher efficiency equipment and 
electrification efforts. For oil-fired storage water heaters and 
electric storage water heaters (>55 gal Veff <=120 gal), DOE 
assumed a constant market share throughout the analysis period (2030-
2059).
    DOE requests comments on its approach for developing efficiency 
trends after 2030, and solicits input on how of the Inflation Reduction 
Act could affect future uptake of higher efficiency water heaters.
2. National Energy Savings
    The national energy savings analysis involves a comparison of 
national energy consumption of the considered products between each 
potential standards case (``TSL'') and the case with no new or amended 
energy conservation standards. DOE calculated the national energy 
consumption by multiplying the number of units (stock) of each product 
(by vintage or age) by the unit energy consumption (also by vintage). 
DOE calculated annual NES based on the difference in national energy 
consumption for the no-new standards case and for each higher 
efficiency standard case. DOE estimated energy consumption and savings 
based on site energy and converted the electricity consumption and 
savings to primary energy (i.e., the energy consumed by power plants to 
generate site electricity) using annual conversion factors derived from 
AEO2023. Cumulative energy savings are the sum of the NES for each year 
over the timeframe of the analysis.
    Use of higher-efficiency products is sometimes associated with a 
direct rebound effect, which refers to an increase in utilization of 
the product due to the increase in efficiency. DOE examined a 2009 
review of empirical estimates of the rebound effect for various energy-
using products.\130\ This review concluded that the econometric and 
quasi-experimental studies suggest a mean value for the direct rebound

[[Page 49124]]

effect for household water heating of around 10 percent. DOE also 
examined a 2012 ACEEE paper \131\ and a 2013 paper by Thomas and 
Azevedo.\132\ Both of these publications examined the same studies that 
were reviewed by Sorrell, as well as Greening et al.,\133\ and 
identified methodological problems with some of the studies. The 
studies believed to be most reliable by Thomas and Azevedo show a 
direct rebound effect for water heating products in the 1-percent to 
15-percent range, while Nadel concludes that a more likely range is 1 
to 12 percent, with rebound effects sometimes higher for low-income 
households who could not afford to adequately heat their homes prior to 
weatherization. DOE applied a rebound effect of 10 percent for consumer 
water heaters used in residential applications based on studies of 
other residential products and the value used for consumer water 
heaters in the 2010 Final Rule for Heating Products, and 0 percent for 
consumer water heaters in commercial applications, which also matches 
EIA's National Energy Modeling System (``NEMS'') for residential and 
commercial water heating and is consistent with other recent energy 
conservation standards rulemakings.134 135 136 137 The 
calculated NES at each efficiency level is therefore reduced by 10 
percent in residential applications. DOE also included the rebound 
effect in the NPV analysis by accounting for the additional net benefit 
from increased consumer water heaters usage, as described in section 
IV.H.3 of this document.
---------------------------------------------------------------------------

    \130\ Steven Sorrell, et al., Empirical Estimates of the Direct 
Rebound Effect: A Review, 37 Energy Policy 1356-71 (2009) (Available 
at www.sciencedirect.com/science/article/pii/S0301421508007131) 
(Last accessed May 1, 2023).
    \131\ Steven Nadel, ``The Rebound Effect: Large or Small?'' 
ACEEE White Paper (August 2012) (Available at www.aceee.org/files/pdf/white-paper/rebound-large-and-small.pdf) (Last accessed May 1, 
2023).
    \132\ Brinda Thomas and Ines Azevedo, Estimating Direct and 
Indirect Rebound Effects for U.S. Households with Input-Output 
Analysis, Part 1: Theoretical Framework, 86 Ecological Econ. 199-201 
(2013) (Available at www.sciencedirect.com/science/article/pii/S0921800912004764) (Last accessed May 1, 2023).
    \133\ Lorna A. Greening, et al., Energy Efficiency and 
Consumption--The Rebound Effect--A Survey, 28 Energy Policy 389-401 
(2002) (Available at www.sciencedirect.com/science/article/pii/S0301421500000215) (Last accessed May 1, 2023).
    \134\ See: www.eia.gov/outlooks/aeo/nems/documentation/residential/pdf/m067(2020).pdf (Last accessed May 1, 2023).
    \135\ DOE. Energy Conservation Program for Certain Industrial 
Equipment: Energy Conservation Standards for Small, Large, and Very 
Large Air-Cooled Commercial Package Air Conditioning and Heating 
Equipment and Commercial Warm Air Furnaces; Direct final rule. 81 FR 
2419 (Jan. 15, 2016) (Available at www.regulations.gov/document/EERE-2013-BT-STD-0021-0055) (Last accessed May 1, 2023).
    \136\ DOE. Energy Conservation Program: Energy Conservation 
Standards for Residential Boilers; Final rule. 81 FR 2319 (Jan. 15, 
2016) (Available at www.regulations.gov/document/EERE-2012-BT-STD-0047-0078) (Last accessed May 1, 2023).
    \137\ DOE. Energy Conservation Program: Energy Conservation 
Standards for Commercial Packaged Boilers; Final Rule. 85 FR 1592 
(Jan. 10, 2020) (Available at www.regulations.gov/document/EERE-2013-BT-STD-0030-0099) (Last accessed May 1, 2023).
---------------------------------------------------------------------------

    DOE requests comments on its approach and value of the rebound 
effect for consumer water heaters.
    In 2011, in response to the recommendations of a committee on 
``Point-of-Use and Full-Fuel-Cycle Measurement Approaches to Energy 
Efficiency Standards'' appointed by the National Academy of Sciences, 
DOE announced its intention to use FFC measures of energy use and 
greenhouse gas and other emissions in the national impact analyses and 
emissions analyses included in future energy conservation standards 
rulemakings. 76 FR 51281 (Aug. 18, 2011). After evaluating the 
approaches discussed in the August 18, 2011 notice, DOE published a 
statement of amended policy in which DOE explained its determination 
that EIA's National Energy Modeling System (``NEMS'') is the most 
appropriate tool for its FFC analysis and its intention to use NEMS for 
that purpose. 77 FR 49701 (Aug. 17, 2012). NEMS is a public domain, 
multi-sector, partial equilibrium model of the U.S. energy sector \138\ 
that EIA uses to prepare its Annual Energy Outlook. The FFC factors 
incorporate losses in production and delivery in the case of natural 
gas (including fugitive emissions) and additional energy used to 
produce and deliver the various fuels used by power plants. The 
approach used for deriving FFC measures of energy use and emissions is 
described in appendix 10B of the NOPR TSD.
---------------------------------------------------------------------------

    \138\ For more information on NEMS, refer to The National Energy 
Modeling System: An Overview 2018, DOE/EIA-0581(2018), April 2019. 
Available at www.eia.gov/outlooks/aeo/nems/overview/pdf/0581(2018).pdf (last accessed May 1, 2023).
---------------------------------------------------------------------------

    EEI stated that DOE continues to utilize a ``fossil fuel 
equivalent'' marginal heat rate for electricity, which likely leads to 
overestimation of pollution reduction in its analysis. EEI stated that 
DOE should utilize the ``captured energy'' approach as outlined in an 
October 2016 report, ``Accounting Methodology for Source Energy of Non-
Combustible Renewable Electricity Generation'' (3412 Btu/kWh for non-
combustible renewable electricity generation). EEI stated that DOE 
could also consider the approach used in certain ASHRAE standards, such 
as Standard 189.1 for Green Commercial Buildings. EEI stated that 
either of these methodologies more accurately capture the ongoing 
transition in the electric sector, and DOE should utilize these more 
accurate metrics in its rulemaking. (EEI, No. 43 at p. 3)
    DOE converts electricity consumption and savings to primary energy 
using annual conversion factors derived from the AEO. Traditionally, 
EIA has used the fossil fuel equivalency approach to report 
noncombustible renewables' contribution to total primary energy, in 
part because the resulting shares of primary energy are closer to the 
shares of generated electricity.\139\ The fossil fuel equivalency 
approach applies an annualized weighted-average heat rate for fossil 
fuel power plants to the electricity generated (in kWh) from 
noncombustible renewables. EIA recognizes that using captured energy 
(the net energy available for direct consumption after transformation 
of a noncombustible renewable energy into electricity) or incident 
energy (the mechanical, radiation, or thermal energy that is measurable 
as the ``input'' to the device) are possible alternative approaches for 
converting renewable electricity to a common measure of primary 
energy,\140\ but it continues to use the fossil fuel equivalency 
approach in the AEO and other reporting of energy statistics. DOE 
contends that it is important for it to maintain consistency with EIA 
in DOE's accounting of primary energy savings from energy efficiency 
standards.
---------------------------------------------------------------------------

    \139\ Without adjusting primary energy for fossil fuel 
equivalence, the non-combustible renewable share of total energy 
consumption for utility-scale electricity generation in 2018 would 
have been 6% instead of the 15% share under the fossil fuel 
equivalency approach. On a physical units basis, net generation from 
noncombustible renewable energy sources was 16% of total utility-
scale net generation in the same year. (see www.eia.gov/todayinenergy/detail.php?id=41013).
    \140\ See: www.eia.gov/totalenergy/data/monthly/pdf/sec12_28.pdf.
---------------------------------------------------------------------------

3. Net Present Value Analysis
    The inputs for determining the NPV of the total costs and benefits 
experienced by consumers are (1) total annual installed cost, (2) total 
annual operating costs (energy costs and repair and maintenance costs), 
and (3) a discount factor to calculate the present value of costs and 
savings. DOE calculates net savings each year as the difference between 
the no-new-standards case and each standards case in terms of total 
savings in operating costs versus total increases in installed costs. 
DOE calculates operating cost savings over the lifetime of each product 
shipped during the projection period.
    As discussed in section IV.F.1 of this document, DOE developed 
consumer water heaters price trends based on historical PPI data. DOE 
applied the same trends to project prices for each

[[Page 49125]]

product class at each considered efficiency level. By 2059, which is 
the end date of the projection period, the average consumer water 
heaters price doesn't change relative to 2022. DOE's projection of 
product prices is described in appendix 10C of the NOPR TSD.
    To evaluate the effect of uncertainty regarding the price trend 
estimates, DOE investigated the impact of different product price 
projections on the consumer NPV for the considered TSLs for consumer 
water heaters. In addition to the default price trend, DOE considered 
two product price sensitivity cases: (1) a price decline case and (2) a 
price increase case based on PPI data. The derivation of these price 
trends and the results of these sensitivity cases are described in 
appendix 10C of the NOPR TSD.
    DOE requests comments on its approach for product price 
projections.
    The operating cost savings are the sum of the differences in energy 
cost savings, maintenance, and repair costs. The maintenance and repair 
costs derivation is described in section IV.F.5. The energy cost 
savings are calculated using the estimated energy savings in each year 
and the projected price of the appropriate form of energy. To estimate 
energy prices in future years, DOE multiplied the average regional 
energy prices by the projection of annual national-average residential 
and commercial energy price changes in the Reference case from AEO2023, 
which has an end year of 2050. To estimate price trends after 2050, DOE 
used the average annual rate of change in prices from 2046 through 
2050. As part of the NIA, DOE also analyzed scenarios that used inputs 
from variants of the AEO2023 Reference case that have lower and higher 
economic growth. Those cases have lower and higher energy price trends 
compared to the Reference case. NIA results based on these cases are 
presented in appendix 10D of the NOPR TSD.
    In considering the consumer welfare gained due to the direct 
rebound effect, DOE accounted for change in consumer surplus attributed 
to additional water heating from the purchase of a more efficient unit. 
Overall consumer welfare is generally understood to be enhanced from 
rebound. The net consumer impact of the rebound effect is included in 
the calculation of operating cost savings in the consumer NPV results. 
See appendix 10E of the NOPR TSD for details on DOE's treatment of the 
monetary valuation of the rebound effect.
    DOE requests comments on its approach to monetizing the impact of 
the rebound effect.
    In calculating the NPV, DOE multiplies the net savings in future 
years by a discount factor to determine their present value. For this 
NOPR, DOE estimated the NPV of consumer benefits using both a 3-percent 
and a 7-percent real discount rate. DOE uses these discount rates in 
accordance with guidance provided by the Office of Management and 
Budget (``OMB'') to Federal agencies on the development of regulatory 
analysis.\141\ The discount rates for the determination of NPV are in 
contrast to the discount rates used in the LCC analysis, which are 
designed to reflect a consumer's perspective. The 7-percent real value 
is an estimate of the average before-tax rate of return to private 
capital in the U.S. economy. The 3-percent real value represents the 
``social rate of time preference,'' which is the rate at which society 
discounts future consumption flows to their present value.
---------------------------------------------------------------------------

    \141\ United States Office of Management and Budget. Circular A-
4: Regulatory Analysis. September 17, 2003. Section E. Available at 
www.whitehouse.gov/omb/memoranda/m03-21.html (last accessed May 1, 
2023).
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I. Consumer Subgroup Analysis

    In analyzing the potential impact of new or amended energy 
conservation standards on consumers, DOE evaluates the impact on 
identifiable subgroups of consumers that may be disproportionately 
affected by a new or amended national standard. The purpose of a 
subgroup analysis is to determine the extent of any such 
disproportional impacts. DOE evaluates impacts on particular subgroups 
of consumers by analyzing the LCC impacts and PBP for those particular 
consumers from alternative standard levels. For this NOPR, DOE analyzed 
the impacts of the considered standard levels on three subgroups: (1) 
low-income households, (2) senior-only households, and (3) small 
businesses. The analysis used subsets of the RECS 2015 sample composed 
of households and CBECS 2018 sample composed of commercial buildings 
that meet the criteria for the three subgroups. DOE used the LCC and 
PBP spreadsheet model to estimate the impacts of the considered 
efficiency levels on these subgroups. Chapter 11 in the NOPR TSD 
describes the consumer subgroup analysis.
1. Low-Income Households
    Low-income households are significantly more likely to be renters 
or live in subsidized housing units, compared to homeowners. DOE notes 
that in these cases the landlord purchases the equipment and may pay 
the gas bill as well. RECS 2015 includes data on whether a household 
pays for the gas bill, allowing DOE to categorize households 
appropriately in the analysis.\142\ For this consumer subgroup 
analysis, DOE considers the impact on the low-income household 
narrowly, excluding any costs or benefits that are accrued by either a 
landlord or subsidized housing agency. This allows DOE to determine 
whether low-income households are disproportionately affected by an 
amended energy conservation standard in a more representative manner. 
DOE takes into account a fraction of renters that face product 
switching (when landlords switch to products that have lower upfront 
costs but higher operating costs, which will be incurred by tenants).
---------------------------------------------------------------------------

    \142\ RECS 2015 includes a category for households that pay only 
some of the gas bill. For the low-income consumer subgroup analysis, 
DOE assumes that these households pay 50 percent of the gas bill, 
and, therefore, would receive 50 percent of operating cost benefits 
of an amended energy conservation standard.
---------------------------------------------------------------------------

    The majority of low-income households that experience a net cost at 
higher efficiency levels are homeowner households, as opposed to 
renters. These households either have a smaller capacity water heater 
or lower hot water use. Unlike renters, homeowners would bear the full 
cost of installing a new water heater. For these households, a 
potential rebate program to reduce the total installed costs would be 
effective in lowering the percentage of low-income consumers with a net 
cost. DOE understands that the landscape of low-income consumers with a 
water heater may change before the compliance date of amended energy 
conservation standards, if finalized. For example, point-of-sale rebate 
programs are being considered that may moderate the impact on low-
income consumers to help offset the total installed cost of a higher 
efficiency water heater, particularly given the lower total installed 
cost of smaller capacity water heater. Currently, DOE is aware that the 
Inflation Reduction Act will likely include incentives for certain 
water heaters, although the specific implementation details have yet to 
be finalized. DOE is also aware of State or utility program rebates in 
the Northeast or California, for example, that support additional heat 
pump deployment as a result of decarbonization policy goals. Point-of-
sale rebates or weatherization programs could also reduce the total 
number of low-income consumers that would be impacted because the 
household no longer has a water heater to upgrade. DOE is particularly 
interested in seeking comment around

[[Page 49126]]

the landscape of heating replacements leading up to 2030, which may 
impact the low-income consumer economics being presented and considered 
in this proposed rulemaking.
    Measures of energy insecurity provide another accounting of the 
number of households that are affected by cost changes due to rules for 
water heating equipment energy efficiency in addition to the senior-
only and low-income categories used by DOE in this analysis. Energy 
insecurity in the 2020 RECS quantifies the households reporting one or 
more of the metrics for energy insecurity, including that they that are 
forgoing basic necessities to pay for energy, and that they leave their 
home at an unhealthy temperature due to energy cost. The energy 
insecurity data are disaggregated by water heating equipment type, 
income category, race, ethnicity, presence of children, presence of 
seniors, regional distribution, and ownership/rental status. DOE has 
determined that the energy insecure designation captures more 
households than the low-income and seniors-only categories used for 
distributional analysis. Similar PBP and net savings/net cost analysis 
applied to energy insecure households could result in larger impacts 
than for the categories DOE chose to analyze and may be more directly 
interpreted in terms of welfare changes that can be disaggregated by 
the factors already listed. DOE seeks comment on conducting 
distributional analysis for energy insecure households in addition to, 
or instead of, the low-income and seniors-only categories currently 
analyzed and described in the NOPR.
    BWC noted their concern regarding the implications of DOE's 
analysis for smaller storage volume products, especially how it may 
impact installations in low to median income households. (BWC, No. 32 
at p. 2) As discussed in section IV.F.2, installation cost analysis 
accounts for significant installation costs for smaller tank volumes in 
particular installed in space constrained installations in mobile 
homes, multi-family buildings, or closet installations in single-family 
homes, which impacts a significant fraction of low-income households. 
DOE has explicitly considered small electric storage water heaters as 
part of this NOPR analysis. See section V.B.1.b for the low-income 
household results, which show that at the considered efficiency levels 
the average LCC savings and PBP are not substantially different from 
the average for all households.
    DOE requests comments on its approach to estimate low-income 
consumer impacts for higher efficiency standards.

J. Manufacturer Impact Analysis

1. Overview
    DOE performed an MIA to estimate the financial impacts of amended 
energy conservation standards on manufacturers of consumer water 
heaters and to estimate the potential impacts of such standards on 
employment and manufacturing capacity. The MIA has both quantitative 
and qualitative aspects and includes analyses of projected industry 
cash flows, the INPV, investments in research and development (``R&D'') 
and manufacturing capital, and domestic manufacturing employment. 
Additionally, the MIA seeks to determine how amended energy 
conservation standards might affect manufacturing employment, capacity, 
and competition, as well as how standards contribute to overall 
regulatory burden. Finally, the MIA serves to identify any 
disproportionate impacts on manufacturer subgroups, including small 
business manufacturers.
    The quantitative part of the MIA primarily relies on the Government 
Regulatory Impact Model (``GRIM''), an industry cash flow model with 
inputs specific to this rulemaking. The key GRIM inputs include data on 
the industry cost structure, unit production costs, product shipments, 
manufacturer markups, and investments in R&D and manufacturing capital 
required to produce compliant products. The key GRIM outputs are the 
INPV, which is the sum of industry annual cash flows over the analysis 
period, discounted using the industry-weighted average cost of capital, 
and the impact to domestic manufacturing employment. The model uses 
standard accounting principles to estimate the impacts of more-
stringent energy conservation standards on a given industry by 
comparing changes in INPV and domestic manufacturing employment between 
a no-new-standards case and the various standards cases (``TSLs''). To 
capture the uncertainty relating to manufacturer pricing strategies 
following amended standards, the GRIM estimates a range of possible 
impacts under different markup scenarios.
    The qualitative part of the MIA addresses manufacturer 
characteristics and market trends. Specifically, the MIA considers such 
factors as a potential standard's impact on manufacturing capacity, 
competition within the industry, the cumulative impact of other DOE and 
non-DOE regulations, and impacts on manufacturer subgroups. The 
complete MIA is outlined in chapter 12 of the NOPR TSD.
    DOE conducted the MIA for this rulemaking in three phases. In Phase 
1 of the MIA, DOE prepared a profile of the consumer water heaters 
manufacturing industry based on the market and technology assessment, 
preliminary manufacturer interviews, and publicly-available 
information. This included a top-down analysis of consumer water 
heaters manufacturers that DOE used to derive preliminary financial 
inputs for the GRIM (e.g., revenues; materials, labor, overhead, and 
depreciation expenses; selling, general, and administrative expenses 
(``SG&A''); and R&D expenses). DOE also used public sources of 
information to further calibrate its initial characterization of the 
consumer water heaters manufacturing industry, including company 
filings of form 10-K from the SEC,\143\ corporate annual reports, the 
U.S. Census Bureau's Economic Census,\144\ and reports from Dunn & 
Bradstreet.\145\
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    \143\ U.S. Securities and Exchange Commission. Company Filings. 
Available at https://www.sec.gov/edgar/searchedgar/companysearch.html.
    \144\ The U.S. Census Bureau. Quarterly Survey of Plant Capacity 
Utilization. Available at www.census.gov/programs-surveys/qpc/data/tables.html.
    \145\ The Dun & Bradstreet Hoovers login is available at 
app.dnbhoovers.com.
---------------------------------------------------------------------------

    In Phase 2 of the MIA, DOE prepared a framework industry cash-flow 
analysis to quantify the potential impacts of amended energy 
conservation standards. The GRIM uses several factors to determine a 
series of annual cash flows starting with the announcement of the 
standard and extending over a 30-year period following the compliance 
date of the standard. These factors include annual expected revenues, 
costs of sales, SG&A and R&D expenses, taxes, and capital expenditures. 
In general, energy conservation standards can affect manufacturer cash 
flow in three distinct ways: (1) creating a need for increased 
investment, (2) raising production costs per unit, and (3) altering 
revenue due to higher per-unit prices and changes in sales volumes.
    In addition, during Phase 2, DOE developed interview guides to 
distribute to manufacturers of consumer water heaters in order to 
develop other key GRIM inputs, including product and capital conversion 
costs, and to gather additional information on the anticipated effects 
of energy conservation standards on revenues, direct employment, 
capital assets, industry competitiveness, and subgroup impacts.

[[Page 49127]]

    In Phase 3 of the MIA, DOE conducted structured, detailed 
interviews with representative manufacturers. During these interviews, 
DOE discussed engineering, manufacturing, procurement, and financial 
topics to validate assumptions used in the GRIM and to identify key 
issues or concerns. See section IV.J.3 of this document for a 
description of the key issues raised by manufacturers during the 
interviews. As part of Phase 3, DOE also evaluated subgroups of 
manufacturers that may be disproportionately impacted by amended 
standards or that may not be accurately represented by the average cost 
assumptions used to develop the industry cash flow analysis. Such 
manufacturer subgroups may include small business manufacturers, low-
volume manufacturers (``LVMs''), niche players, and/or manufacturers 
exhibiting a cost structure that largely differs from the industry 
average. DOE identified one subgroup for a separate impact analysis: 
small business manufacturers. The small business subgroup is discussed 
in section VI.B, ``Review under the Regulatory Flexibility Act'' and in 
chapter 12 of the NOPR TSD.
2. Government Regulatory Impact Model and Key Inputs
    DOE uses the GRIM to quantify the changes in cash flow due to 
amended standards that result in a higher or lower industry value. The 
GRIM uses a standard, annual discounted cash-flow analysis that 
incorporates manufacturer costs, markups, shipments, and industry 
financial information as inputs. The GRIM models changes in costs, 
distribution of shipments, investments, and manufacturer margins that 
could result from an amended energy conservation standard. The GRIM 
spreadsheet uses the inputs to arrive at a series of annual cash flows, 
beginning in 2023 (the base year of the analysis) and continuing to 
2059. DOE calculated INPVs by summing the stream of annual discounted 
cash flows during this period. For manufacturers of consumer water 
heaters, DOE used a real discount rate of 9.3 percent, which was 
derived from industry financials and then modified according to 
feedback received during manufacturer interviews.
    The GRIM calculates cash flows using standard accounting principles 
and compares changes in INPV between the no-new-standards case and each 
standards case. The difference in INPV between the no-new-standards 
case and a standards case represents the financial impact of the 
amended energy conservation standard on manufacturers. As discussed 
previously, DOE developed critical GRIM inputs using a number of 
sources, including publicly available data, results of the engineering 
analysis, and information gathered from industry stakeholders during 
the course of manufacturer interviews and subsequent Working Group 
meetings. The GRIM results are presented in section V.B.2. Additional 
details about the GRIM, the discount rate, and other financial 
parameters can be found in chapter 12 of the NOPR TSD.
a. Manufacturer Production Costs
    Manufacturing more efficient equipment is typically more expensive 
than manufacturing baseline equipment due to the use of more complex 
components, which are typically more costly than baseline components. 
The changes in the MPCs of covered products can affect the revenues, 
gross margins, and cash flow of the industry.
    As discussed in section IV.C.1 of this document, DOE conducted a 
market analysis of currently available models listed in DOE's CCD to 
determine which efficiency levels were most representative of the 
current distribution of consumer water heaters available on the market. 
DOE also completed physical teardowns of commercially available units 
to determine which design options manufacturers may use to achieve 
certain efficiency levels for each water heater category analyzed. DOE 
requested comments from stakeholders and conducted interviews with 
manufacturers concerning these initial efficiency levels, which have 
been updated in this NOPR based on the feedback DOE received. For a 
complete description of the MPCs, see chapter 5 of the NOPR TSD.
b. Shipments Projections
    The GRIM estimates manufacturer revenues based on total unit 
shipment projections and the distribution of those shipments by 
efficiency level. Changes in sales volumes and efficiency mix over time 
can significantly affect manufacturer finances. For this analysis, the 
GRIM uses the NIA's annual shipment projections derived from the 
shipments analysis from 2023 (the base year) to 2059 (the end year of 
the analysis period). See chapter 9 of the NOPR TSD for additional 
details.
c. Product and Capital Conversion Costs
    Amended energy conservation standards could cause manufacturers to 
incur conversion costs to bring their production facilities and 
equipment designs into compliance. DOE evaluated the level of 
conversion-related expenditures that would be needed to comply with 
each considered efficiency level in each product class. For the MIA, 
DOE classified these conversion costs into two major groups: (1) 
product conversion costs; and (2) capital conversion costs. Product 
conversion costs are investments in research, development, testing, 
marketing, and other non-capitalized costs necessary to make product 
designs comply with amended energy conservation standards. Capital 
conversion costs are investments in property, plant, and equipment 
necessary to adapt or change existing production facilities such that 
new compliant product designs can be fabricated and assembled.
    To evaluate the level of product conversion costs manufacturers 
would likely incur to comply with amended energy conservation 
standards, DOE relied on feedback from manufacturer interviews. DOE 
contractors conducted interviews with manufacturer of gas-fired 
storage, gas-fired instantaneous, oil-fired storage, electric storage, 
electric instantaneous, tabletop, and grid-enabled water heaters. The 
interviewed manufacturers account for approximately 80 percent of unit 
sales in the industry. DOE used market share weighted feedback from 
interviews to extrapolate industry-level product conversion costs from 
the manufacturer feedback.
    To evaluate the level of capital conversion costs manufacturers 
would likely incur to comply with amended energy conservation 
standards, DOE relied on estimate of equipment and tooling from its 
engineering analysis and on feedback from manufacturer interviews. DOE 
modeled the green field investments required for a major manufacturer 
to setup a production facility. The investment figures included capital 
required for manufacturing equipment, tooling, conveyor, facility. DOE 
then modeled the incremental investment required by increases in 
standards. DOE multiplied the incremental investment by number of major 
manufacturers. These investment levels aligned well with feedback from 
interviews. Additionally, DOE determined that smaller manufacturers 
would have lower investment levels given their lower production volumes 
and accounted for those lower investments for manufacturer with lower 
market share.
    In general, DOE assumes all conversion-related investments occur 
between the year of publication of the final rule and the year by which 
manufacturers must comply with the new standard. The conversion cost

[[Page 49128]]

figures used in the GRIM can be found in section V.B.2 of this 
document. For additional information on the estimated capital and 
product conversion costs, see chapter 12 of the NOPR TSD.
d. Manufacturer Markup Scenarios
    MSPs include direct manufacturing production costs (i.e., labor, 
materials, and overhead estimated in DOE's MPCs) and all non-production 
costs (i.e., SG&A, R&D, and interest), along with profit. To calculate 
the MSPs in the GRIM, DOE applied manufacturer markups to the MPCs 
estimated in the engineering analysis for each product class and 
efficiency level. Modifying these markups in the standards case yields 
different sets of impacts on manufacturers. For the MIA, DOE modeled 
two standards-case markup scenarios to represent uncertainty regarding 
the potential impacts on prices and profitability for manufacturers 
following the implementation of amended energy conservation standards: 
(1) a preservation of gross margin percentage scenario; and (2) a 
preservation of operating profit scenario. These scenarios lead to 
different markup values that, when applied to the MPCs, result in 
varying revenue and cash flow impacts.
    Under the preservation of gross margin percentage scenario, DOE 
applied a single uniform ``gross margin percentage'' markup across all 
efficiency levels, which assumes that manufacturers would be able to 
maintain the same amount of profit as a percentage of revenues at all 
efficiency levels within a product class. As manufacturer production 
costs increase with efficiency, this scenario implies that the per-unit 
dollar profit will increase. DOE estimated gross margin percentages of 
24% for the gas-fired storage product class, 22% for electric storage, 
23% for oil-fired storage, and 31% for gas-fired instantaneous.\146\ 
Manufacturers tend to believe it is optimistic to assume that they 
would be able to maintain the same gross margin percentage as their 
production costs increase, particularly for minimally efficient 
products. Therefore, this scenario represents a high bound to industry 
profitability under an amended energy conservation standard.
---------------------------------------------------------------------------

    \146\ The gross margin percentage of 24 percent for gas-fired 
storage is based on a manufacturer markup of 1.31. The gross margin 
percentage of 22 percent for electric storage is based on a 
manufacturer markup of 1.28.The gross margin percentage of 23 
percent for oil-fired storage is based on a manufacturer markup of 
1.30. The gross margin percentage of 31 percent for gas-fired 
instantaneous is based on a manufacturer markup of 1.45.
---------------------------------------------------------------------------

    Under the preservation of operating profit markup scenario, DOE 
modeled a situation in which manufacturers are not able to increase 
per-unit operating profit in proportion to increases in manufacturer 
production costs. In the preservation of operating profit scenario, as 
the cost of production goes up under a standards case, manufacturers 
are generally required to reduce their manufacturer markups to a level 
that maintains base-case operating profit. DOE implemented this 
scenario in the GRIM by lowering the manufacturer markups at each TSL 
to yield approximately the same earnings before interest and taxes in 
the standards case as in the no-new-standards case in the year after 
the compliance date of the amended standards. The implicit assumption 
behind this scenario is that the industry can only maintain its 
operating profit in absolute dollars after the standard. A comparison 
of industry financial impacts under the two manufacturer markup 
scenarios is presented in section V.B.2.a of this document.
    A comparison of industry financial impacts under the two markup 
scenarios is presented in section V.B.2.a of this document.
3. Manufacturer Interviews
    DOE interviewed manufacturers representing approximately 80 percent 
of the consumer water heaters industry by shipment volume. Participants 
included manufacturers of gas-fired storage, gas-fired instantaneous, 
oil-fired storage, electric storage, electric instantaneous, tabletop, 
and grid enabled water heaters.
    In interviews, DOE asked manufacturers to describe their major 
concerns regarding potential amended standards for consumer water 
heaters. The following section highlights manufacturer concerns in an 
aggregated fashion that helped inform the projected potential impacts 
of an amended standard on the industry. Manufacturer interviews are 
conducted under non-disclosure agreements (``NDAs''), so DOE does not 
document these discussions in the same way that it does public comments 
in the comment summaries and DOE's responses throughout the rest of 
this document.
a. Level of Investment Associated With Concurrent Technology Shifts
    Manufacturers raised concerns about the potential for multiple 
significant technology shifts associated with this rulemaking. They 
noted that the adoption of a standard level requiring condensing 
technology for gas-fired storage water heaters would potentially 
require large investments to expand production capacity. At higher 
condensing efficiencies, manufacturers anticipated a range of 
manufacturing bottlenecks associated with more complex assembly, 
heavier products, and longer production times. To resolve these 
bottlenecks, manufacturers expected investments in additional 
production equipment and tooling. Manufacturers further noted that, in 
some cases, new additional production lines would have to be added.
    Manufacturers also raised concern that the adoption of a standard 
level requiring heat pump technology for electric storage water heaters 
would require substantial investment in expanding and retooling 
production facilities. Manufacturers noted that only a small percentage 
of the electric storage water heaters market uses heat pumps today. 
Manufacturers would need to update a broad range of designs to meet 
market needs. Additionally, industry would need to substantially expand 
heat pump water heater production. Manufacturers noted they would need 
to significantly change their electric water heater manufacturing 
layout. Some manufacturers anticipated the need to develop multiple new 
production lines to service the market.
    Manufactures noted that concurrent shifts in technology would lead 
to very high investment levels in a short period of time. Additional 
manufacturers were concerned about having the technical resources to 
manage the technology changes within the conversion period. Finally, 
manufacturers noted that the shift to heat pump water heaters is 
further complicated by regulatory and market uncertainty related to 
refrigerants due to the American Innovation and Manufacturing (AIM) 
Act, which directs EPA to phase down hydrofluorocarbons (HFCs) 
production and consumption and includes sector-based restrictions. 
Additionally, manufacturers noted that several states have introduced 
their own HFC phase-down regulations. Manufacturers raised concerns 
that state actions could further complicate refrigerant restrictions.
b. Lowboy Electric Storage Water Heaters
    In interviews, manufacturers raised concerns about the effect 
higher standards would have on specific designs, known as ``lowboys,'' 
which are used in height-restricted installations. In particular, 
manufacturers asserted that the adoption of integrated heat pump 
technology, which would add significant height to water heaters, would 
present challenges for some

[[Page 49129]]

installations. For this reason, manufacturers stated that lowboy 
electric storage water heaters could not be easily replaced with heat 
pump water heaters that are currently available on the market. However, 
as discussed in the engineering analysis, DOE has tentatively 
determined that split-system heat pump designs would still be feasible 
for lowboy installations without increasing the height of the product. 
See section IV.C.1 for details.
4. Discussion of MIA Comments
    BWC urged DOE to consider the cumulative burden placed on 
manufacturers by the simultaneous occurrence of multiple rulemakings. 
Additionally, BWC requested DOE consider the impact of regulations 
outside the seven-year period around when this rulemaking would come 
into effect. (BWC, No. 32 at pp. 4)
    DOE analyzes cumulative regulatory burden pursuant to appendix A. 
Pursuant to appendix A, the Department will recognize and consider the 
overlapping effects on manufacturers of new or revised DOE standards 
and other Federal regulatory actions affecting the same products or 
equipment. The results of this analysis can be found in section V.B.2.e 
of this document.
    BWC stated that Steffes Corporation and Hubbell were not included 
in DOE's list of small business manufacturers of consumer water heaters 
and suggested they be added. (BWC, No. 32 at p. 5). DOE notes that 
Hubbell Corporation was included in DOE's list of manufacturers under 
the name of its parent company at the time, HEH Holdings. Hubbell's 
parent company has since changed to the Nudyne Group LLC. DOE continues 
to consider the company and its products in its analyses. Based on 
BWC's written comment, DOE reviewed the products from Steffes 
Corporation. Based on publicly available product information, Steffes 
Corporation's products appear to be for multi-family homes and the 
products' rated input would exceed the thresholds for consumer water 
heaters. DOE has not included Steffes Corporation in its list of small 
business consumer water heater manufacturers.

K. Emissions Analysis

    The emissions analysis consists of two components. The first 
component estimates the effect of potential energy conservation 
standards on power sector and site (where applicable) combustion 
emissions of CO2, NOX, SO2, and Hg. 
The second component estimates the impacts of potential standards on 
emissions of two additional greenhouse gases, CH4 and 
N2O, as well as the reductions to emissions of other gases 
due to ``upstream'' activities in the fuel production chain. These 
upstream activities comprise extraction, processing, and transporting 
fuels to the site of combustion.
    The analysis of electric power sector emissions of CO2, 
NOX, SO2, and Hg uses emissions factors intended 
to represent the marginal impacts of the change in electricity 
consumption associated with amended or new standards. The methodology 
is based on results published for the AEO, including a set of side 
cases that implement a variety of efficiency-related policies. The 
methodology is described in appendix 13A in the NOPR TSD. The analysis 
presented in this notice uses projections from AEO2023. Power sector 
emissions of CH4 and N2O from fuel combustion are 
estimated using Emission Factors for Greenhouse Gas Inventories 
published by the EPA.\147\
---------------------------------------------------------------------------

    \147\ U.S. Environmental Protection Agency. Emission Factors for 
Greenhouse Gas Inventories. Available at www.epa.gov/sites/production/files/2021-04/documents/emission-factors_apr2021.pdf 
(last accessed May 1, 2023).
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    The on-site operation of consumer water heaters requires combustion 
of fossil fuels and results in emissions of CO2, 
NOX, SO2 CH4 and N2O where 
these products are used. Site emissions of these gases were estimated 
using Emission Factors for Greenhouse Gas Inventories and, for 
NOX and SO2 emissions intensity factors from an 
EPA publication.\148\
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    \148\ U.S. Environmental Protection Agency. External Combustion 
Sources. In Compilation of Air Pollutant Emission Factors. AP-42. 
Fifth Edition. Volume I: Stationary Point and Area Sources. Chapter 
1. Available at www.epa.gov/ttn/chief/ap42/index.html (last accessed 
May 1, 2023).
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    FFC upstream emissions, which include emissions from fuel 
combustion during extraction, processing, and transportation of fuels, 
and ``fugitive'' emissions (direct leakage to the atmosphere) of 
CH4 and CO2, are estimated based on the 
methodology described in chapter 15 of the NOPR TSD.
    BWC stated that in regard to the NOPR Emissions Impact Analysis, in 
addition to DOE's consideration of the upstream emissions as it relates 
to the power sector, they recommend DOE also analyze additional 
emissions generated to comply with an amended standard. With an amended 
standard more complex components and more of certain existing 
components will be required to comply. BWC believes that more emissions 
will be generated to produce these components to comply with an amended 
standard versus what will be saved by requiring higher efficiency 
equipment. (BWC, No. 32 at p. 6)
    In determining the economic justification of a standard, EPCA 
requires DOE to consider the total projected energy savings that are 
expected to result directly from the standard. (42 U.S.C. 
6295(o)(2)(B)(i)(III)) DOE considers full-fuel cycle energy savings, 
including the energy consumed in electricity production, in 
distribution and transmission, and in extracting, processing, and 
transporting primary fuels. DOE further analyzes the emissions savings 
associated with those projected energy savings. DOE does not analyze 
energy or emissions savings related to manufacturing, recycling, or 
disposing of products, as such impacts would not be considered a direct 
result of the standard on the energy use of the covered product. DOE 
did take into account the increased electricity consumption due to 
increased electricity use in higher efficiency design options. See 
chapter 7 for more details.
    The emissions intensity factors are expressed in terms of physical 
units per MWh or MMBtu of site energy savings. For power sector 
emissions, specific emissions intensity factors are calculated by 
sector and end use. Total emissions reductions are estimated using the 
energy savings calculated in the national impact analysis.
1. Air Quality Regulations Incorporated in DOE's Analysis
    DOE's no-new-standards case for the electric power sector reflects 
the AEO, which incorporates the projected impacts of existing air 
quality regulations on emissions. AEO2023 generally represents current 
legislation and environmental regulations, including recent government 
actions, that were in place at the time of preparation of AEO2023, 
including the emissions control programs discussed in the following 
paragraphs.\149\
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    \149\ For further information, see the Assumptions to AEO2023 
report that sets forth the major assumptions used to generate the 
projections in the Annual Energy Outlook. Available at www.eia.gov/outlooks/aeo/assumptions/ (last accessed May 1, 2023).
---------------------------------------------------------------------------

    SO2 emissions from affected electric generating units 
(``EGUs'') are subject to nationwide and regional emissions cap-and-
trade programs. Title IV of the Clean Air Act sets an annual emissions 
cap on SO2 for affected EGUs in the 48 contiguous States and 
the District of Columbia (DC). (42 U.S.C. 7651 et seq.) SO2 
emissions from numerous States in the eastern half of the United States 
are also limited under the Cross-State Air Pollution Rule (``CSAPR''). 
76 FR 48208

[[Page 49130]]

(Aug. 8, 2011). CSAPR requires these States to reduce certain 
emissions, including annual SO2 emissions, and went into 
effect as of January 1, 2015.\150\ AEO2023 incorporates implementation 
of CSAPR, including the update to the CSAPR ozone season program 
emission budgets and target dates issued in 2016. 81 FR 74504 (Oct. 26, 
2016). Compliance with CSAPR is flexible among EGUs and is enforced 
through the use of tradable emissions allowances. Under existing EPA 
regulations, any excess SO2 emissions allowances resulting 
from the lower electricity demand caused by the adoption of an 
efficiency standard could be used to permit offsetting increases in 
SO2 emissions by another regulated EGU.
---------------------------------------------------------------------------

    \150\ CSAPR requires states to address annual emissions of 
SO2 and NOX, precursors to the formation of 
fine particulate matter (PM2.5) pollution, in order to 
address the interstate transport of pollution with respect to the 
1997 and 2006 PM2.5 National Ambient Air Quality 
Standards (``NAAQS''). CSAPR also requires certain states to address 
the ozone season (May-September) emissions of NOX, a 
precursor to the formation of ozone pollution, in order to address 
the interstate transport of ozone pollution with respect to the 1997 
ozone NAAQS. 76 FR 48208 (Aug. 8, 2011). EPA subsequently issued a 
supplemental rule that included an additional five states in the 
CSAPR ozone season program; 76 FR 80760 (Dec. 27, 2011) 
(Supplemental Rule).
---------------------------------------------------------------------------

    However, beginning in 2016, SO2 emissions began to fall 
as a result of the Mercury and Air Toxics Standards (``MATS'') for 
power plants. 77 FR 9304 (Feb. 16, 2012). The final rule establishes 
power plant emission standards for mercury, acid gases, and non-mercury 
metallic toxic pollutants. In order to continue operating, coal power 
plants must have either flue gas desulfurization or dry sorbent 
injection systems installed. Both technologies, which are used to 
reduce acid gas emissions, also reduce SO2 emissions. 
Because of the emissions reductions under the MATS, it is unlikely that 
excess SO2 emissions allowances resulting from the lower 
electricity demand would be needed or used to permit offsetting 
increases in SO2 emissions by another regulated EGU. 
Therefore, energy conservation standards that decrease electricity 
generation would generally reduce SO2 emissions. DOE 
estimated SO2 emissions reduction using emissions factors 
based on AEO2023.
    CSAPR also established limits on NOX emissions for 
numerous States in the eastern half of the United States. Energy 
conservation standards would have little effect on NOX 
emissions in those States covered by CSAPR emissions limits if excess 
NOX emissions allowances resulting from the lower 
electricity demand could be used to permit offsetting increases in 
NOX emissions from other EGUs. In such case, NOX 
emissions would remain near the limit even if electricity generation 
goes down. A different case could possibly result, depending on the 
configuration of the power sector in the different regions and the need 
for allowances, such that NOX emissions might not remain at 
the limit in the case of lower electricity demand. In this case, energy 
conservation standards might reduce NOX emissions in covered 
States. Despite this possibility, DOE has chosen to be conservative in 
its analysis and has maintained the assumption that standards will not 
reduce NOX emissions in States covered by CSAPR. Energy 
conservation standards would be expected to reduce NOX 
emissions in the States not covered by CSAPR. DOE used AEO2023 data to 
derive NOX emissions factors for the group of States not 
covered by CSAPR.
    The MATS limit mercury emissions from power plants, but they do not 
include emissions caps and, as such, DOE's energy conservation 
standards would be expected to slightly reduce Hg emissions. DOE 
estimated mercury emissions reduction using emissions factors based on 
AEO2023, which incorporates the MATS.

L. Monetizing Emissions Impacts

    As part of the development of this proposed rule, for the purpose 
of complying with the requirements of Executive Order 12866, DOE 
considered the estimated monetary benefits from the reduced emissions 
of CO2, CH4, N2O, NOX, and 
SO2 that are expected to result from each of the TSLs 
considered. In order to make this calculation analogous to the 
calculation of the NPV of consumer benefit, DOE considered the reduced 
emissions expected to result over the lifetime of products shipped in 
the projection period for each TSL. This section summarizes the basis 
for the values used for monetizing the emissions benefits and presents 
the values considered in this NOPR.
    To monetize the benefits of reducing GHG emissions, this analysis 
uses the interim estimates presented in the Technical Support Document: 
Social Cost of Carbon, Methane, and Nitrous Oxide Interim Estimates 
Under Executive Order 13990 published in February 2021 by the IWG.
1. Monetization of Greenhouse Gas Emissions
    DOE estimates the monetized benefits of the reductions in emissions 
of CO2, CH4, and N2O by using a 
measure of the SC of each pollutant (e.g., SC-CO2). These 
estimates represent the monetary value of the net harm to society 
associated with a marginal increase in emissions of these pollutants in 
a given year, or the benefit of avoiding that increase. These estimates 
are intended to include (but are not limited to) climate-change-related 
changes in net agricultural productivity, human health, property 
damages from increased flood risk, disruption of energy systems, risk 
of conflict, environmental migration, and the value of ecosystem 
services.
    DOE exercises its own judgment in presenting monetized climate 
benefits as recommended by applicable Executive orders, and DOE would 
reach the same conclusion presented in this proposed rulemaking in the 
absence of the social cost of greenhouse gases. That is, the social 
costs of greenhouse gases, whether measured using the February 2021 
interim estimates presented by the Interagency Working Group on the 
Social Cost of Greenhouse Gases or by another means, did not affect the 
rule ultimately proposed by DOE.
    DOE estimated the global social benefits of CO2, 
CH4, and N2O reductions using SC-GHG values that 
were based on the interim values presented in the Technical Support 
Document: Social Cost of Carbon, Methane, and Nitrous Oxide Interim 
Estimates under Executive Order 13990, published in February 2021 by 
the IWG. The SC-GHGs is the monetary value of the net harm to society 
associated with a marginal increase in emissions in a given year, or 
the benefit of avoiding that increase. In principle, SC-GHGs includes 
the value of all climate change impacts, including (but not limited to) 
changes in net agricultural productivity, human health effects, 
property damage from increased flood risk and natural disasters, 
disruption of energy systems, risk of conflict, environmental 
migration, and the value of ecosystem services. The SC-GHGs therefore, 
reflects the societal value of reducing emissions of the gas in 
question by one metric ton. The SC-GHGs is the theoretically 
appropriate value to use in conducting benefit-cost analyses of 
policies that affect CO2, N2O and CH4 emissions. 
As a member of the IWG involved in the development of the February 2021 
SC-GHG TSD, DOE agrees that the interim SC-GHG estimates represent the 
most appropriate estimate of the SC-GHG until revised estimates have 
been developed reflecting the latest, peer-reviewed science.
    The SC-GHGs estimates presented here were developed over many 
years, using transparent process, peer-reviewed methodologies, the best

[[Page 49131]]

science available at the time of that process, and with input from the 
public. Specifically, in 2009, the IWG, that included the DOE and other 
executive branch agencies and offices was established to ensure that 
agencies were using the best available science and to promote 
consistency in the social cost of carbon (SC-CO2) values 
used across agencies. The IWG published SC-CO2 estimates in 
2010 that were developed from an ensemble of three widely cited 
integrated assessment models (IAMs) that estimate global climate 
damages using highly aggregated representations of climate processes 
and the global economy combined into a single modeling framework. The 
three IAMs were run using a common set of input assumptions in each 
model for future population, economic, and CO2 emissions 
growth, as well as equilibrium climate sensitivity--a measure of the 
globally averaged temperature response to increased atmospheric 
CO2 concentrations. These estimates were updated in 2013 
based on new versions of each IAM. In August 2016 the IWG published 
estimates of the social cost of methane (SC-CH4) and nitrous 
oxide (SC-N2O) using methodologies that are consistent with 
the methodology underlying the SC-CO2 estimates. The 
modeling approach that extends the IWG SC-CO2 methodology to 
non-CO2 GHGs has undergone multiple stages of peer review. 
The SC-CH4 and SC-N2O estimates were developed by 
Marten et al.\151\ and underwent a standard double-blind peer review 
process prior to journal publication. In 2015, as part of the response 
to public comments received to a 2013 solicitation for comments on the 
SC-CO2 estimates, the IWG announced a National Academies of 
Sciences, Engineering, and Medicine review of the SC-CO2 
estimates to offer advice on how to approach future updates to ensure 
that the estimates continue to reflect the best available science and 
methodologies. In January 2017, the National Academies released their 
final report, Valuing Climate Damages: Updating Estimation of the 
Social Cost of Carbon Dioxide, and recommended specific criteria for 
future updates to the SC-CO2 estimates, a modeling framework 
to satisfy the specified criteria, and both near-term updates and 
longer-term research needs pertaining to various components of the 
estimation process (National Academies, 2017).\152\ Shortly thereafter, 
in March 2017, President Trump issued Executive Order 13783, which 
disbanded the IWG, withdrew the previous TSDs, and directed agencies to 
ensure SC-CO2 estimates used in regulatory analyses are 
consistent with the guidance contained in OMB's Circular A-4, 
``including with respect to the consideration of domestic versus 
international impacts and the consideration of appropriate discount 
rates'' (E.O. 13783, Section 5(c)). Benefit-cost analyses following 
E.O. 13783 used SC-GHG estimates that attempted to focus on the U.S.-
specific share of climate change damages as estimated by the models and 
were calculated using two discount rates recommended by Circular A-4, 3 
percent and 7 percent. All other methodological decisions and model 
versions used in SC-GHG calculations remained the same as those used by 
the IWG in 2010 and 2013, respectively.
---------------------------------------------------------------------------

    \151\ Marten, A.L., E.A. Kopits, C.W. Griffiths, S.C. Newbold, 
and A. Wolverton. Incremental CH4 and N2O 
mitigation benefits consistent with the US Government's SC-
CO2 estimates. Climate Policy. 2015. 15(2): pp. 272-298.
    \152\ National Academies of Sciences, Engineering, and Medicine. 
Valuing Climate Damages: Updating Estimation of the Social Cost of 
Carbon Dioxide. 2017. The National Academies Press: Washington, DC.
---------------------------------------------------------------------------

    On January 20, 2021, President Biden issued Executive Order 13990, 
which re-established the IWG and directed it to ensure that the U.S. 
Government's estimates of the social cost of carbon and other 
greenhouse gases reflect the best available science and the 
recommendations of the National Academies (2017). The IWG was tasked 
with first reviewing the SC-GHG estimates currently used in Federal 
analyses and publishing interim estimates within 30 days of the E.O. 
that reflect the full impact of GHG emissions, including by taking 
global damages into account. The interim SC-GHG estimates published in 
February 2021 are used here to estimate the climate benefits for this 
proposed rulemaking. The E.O. instructs the IWG to update the interim 
SC-GHG estimates by January 2022, taking into consideration the advice 
of the National Academies of Science, Engineering, and Medicine as 
reported in Valuing Climate Damages: Updating Estimation of the Social 
Cost of Carbon Dioxide (2017) and other recent scientific literature. 
The February 2021 SC-GHG TSD provides a complete discussion of the 
IWG's initial review conducted under E.O.13990. In particular, the IWG 
found that the SC-GHG estimates used under E.O. 13783 fail to reflect 
the full impact of GHG emissions in multiple ways.
    First, the IWG found that the SC-GHG estimates used under E.O. 
13783 fail to fully capture many climate impacts that affect the 
welfare of U.S. citizens and residents, and those impacts are better 
reflected by global measures of the SC-GHG. Examples of omitted effects 
from the E.O. 13783 estimates include direct effects on U.S. citizens, 
assets, and investments located abroad, supply chains, U.S. military 
assets and interests abroad, and tourism, and spillover pathways such 
as economic and political destabilization and global migration that can 
lead to adverse impacts on U.S. national security, public health, and 
humanitarian concerns. In addition, assessing the benefits of U.S. GHG 
mitigation activities requires consideration of how those actions may 
affect mitigation activities by other countries, as those international 
mitigation actions will provide a benefit to U.S. citizens and 
residents by mitigating climate impacts that affect U.S. citizens and 
residents. A wide range of scientific and economic experts have 
emphasized the issue of reciprocity as support for considering global 
damages of GHG emissions. If the United States does not consider 
impacts on other countries, it is difficult to convince other countries 
to consider the impacts of their emissions on the United States. The 
only way to achieve an efficient allocation of resources for emissions 
reduction on a global basis--and so benefit the U.S. and its citizens--
is for all countries to base their policies on global estimates of 
damages. As a member of the IWG involved in the development of the 
February 2021 SC-GHG TSD, DOE agrees with this assessment and, 
therefore, in this proposed rule DOE centers attention on a global 
measure of SC-GHG. This approach is the same as that taken in DOE 
regulatory analyses from 2012 through 2016. A robust estimate of 
climate damages that accrue only to U.S. citizens and residents does 
not currently exist in the literature. As explained in the February 
2021 TSD, existing estimates are both incomplete and an underestimate 
of total damages that accrue to the citizens and residents of the U.S. 
because they do not fully capture the regional interactions and 
spillovers discussed above, nor do they include all of the important 
physical, ecological, and economic impacts of climate change recognized 
in the climate change literature. As noted in the February 2021 SC-GHG 
TSD, the IWG will continue to review developments in the literature, 
including more robust methodologies for estimating a U.S.-specific SC-
GHG value, and explore ways to better inform the public of the full 
range of carbon impacts. As a member of the IWG, DOE

[[Page 49132]]

will continue to follow developments in the literature pertaining to 
this issue.
    Second, the IWG found that the use of the social rate of return on 
capital (7 percent under current OMB Circular A-4 guidance) to discount 
the future benefits of reducing GHG emissions inappropriately 
underestimates the impacts of climate change for the purposes of 
estimating the SC-GHG. Consistent with the findings of the National 
Academies (2017) and the economic literature, the IWG continued to 
conclude that the consumption rate of interest is the theoretically 
appropriate discount rate in an intergenerational context,\153\ and 
recommended that discount rate uncertainty and relevant aspects of 
intergenerational ethical considerations be accounted for in selecting 
future discount rates.
---------------------------------------------------------------------------

    \153\ Interagency Working Group on Social Cost of Carbon. Social 
Cost of Carbon for Regulatory Impact Analysis under Executive Order 
12866. 2010. United States Government. Available at www.epa.gov/sites/default/files/2016-12/documents/scc_tsd_2010.pdf (last 
accessed May 1, 2023); Interagency Working Group on Social Cost of 
Carbon. Technical Update of the Social Cost of Carbon for Regulatory 
Impact Analysis Under Executive Order 12866. 2013. Available at 
www.federalregister.gov/documents/2013/11/26/2013-28242/technical-support-document-technical-update-of-the-social-cost-of-carbon-for-regulatory-impact (last accessed May 1, 2023); Interagency Working 
Group on Social Cost of Greenhouse Gases, United States Government. 
Technical Support Document: Technical Update on the Social Cost of 
Carbon for Regulatory Impact Analysis--Under Executive Order 12866. 
August 2016. Available at www.epa.gov/sites/default/files/2016-12/documents/sc_co2_tsd_august_2016.pdf (last accessed May 1, 2023); 
Interagency Working Group on Social Cost of Greenhouse Gases, United 
States Government. Addendum to Technical Support Document on Social 
Cost of Carbon for Regulatory Impact Analysis under Executive Order 
12866: Application of the Methodology to Estimate the Social Cost of 
Methane and the Social Cost of Nitrous Oxide. August 2016. Available 
at www.epa.gov/sites/default/files/2016-12/documents/addendum_to_sc-ghg_tsd_august_2016.pdf (last accessed May 1, 2023).
---------------------------------------------------------------------------

    Furthermore, the damage estimates developed for use in the SC-GHG 
are estimated in consumption-equivalent terms, and so an application of 
OMB Circular A-4's guidance for regulatory analysis would then use the 
consumption discount rate to calculate the SC-GHG. DOE agrees with this 
assessment and will continue to follow developments in the literature 
pertaining to this issue. DOE also notes that while OMB Circular A-4, 
as published in 2003, recommends using 3% and 7% discount rates as 
``default'' values, Circular A-4 also reminds agencies that ``different 
regulations may call for different emphases in the analysis, depending 
on the nature and complexity of the regulatory issues and the 
sensitivity of the benefit and cost estimates to the key assumptions.'' 
On discounting, Circular A-4 recognizes that ``special ethical 
considerations arise when comparing benefits and costs across 
generations,'' and Circular A-4 acknowledges that analyses may 
appropriately ``discount future costs and consumption benefits . . . at 
a lower rate than for intragenerational analysis.'' In the 2015 
Response to Comments on the Social Cost of Carbon for Regulatory Impact 
Analysis, OMB, DOE, and the other IWG members recognized that 
``Circular A-4 is a living document'' and ``the use of 7 percent is not 
considered appropriate for intergenerational discounting. There is wide 
support for this view in the academic literature, and it is recognized 
in Circular A-4 itself.'' Thus, DOE concludes that a 7% discount rate 
is not appropriate to apply to value the social cost of greenhouse 
gases in the analysis presented in this analysis.
    To calculate the present and annualized values of climate benefits, 
DOE uses the same discount rate as the rate used to discount the value 
of damages from future GHG emissions, for internal consistency. That 
approach to discounting follows the same approach that the February 
2021 TSD recommends ``to ensure internal consistency--i.e., future 
damages from climate change using the SC-GHG at 2.5 percent should be 
discounted to the base year of the analysis using the same 2.5 percent 
rate.'' DOE has also consulted the National Academies' 2017 
recommendations on how SC-GHG estimates can ``be combined in RIAs with 
other cost and benefits estimates that may use different discount 
rates.'' The National Academies reviewed several options, including 
``presenting all discount rate combinations of other costs and benefits 
with [SC-GHG] estimates.''
    As a member of the IWG involved in the development of the February 
2021 SC-GHG TSD, DOE agrees with the above assessment and will continue 
to follow developments in the literature pertaining to this issue. 
While the IWG works to assess how best to incorporate the latest, peer 
reviewed science to develop an updated set of SC-GHG estimates, it set 
the interim estimates to be the most recent estimates developed by the 
IWG prior to the group being disbanded in 2017. The estimates rely on 
the same models and harmonized inputs and are calculated using a range 
of discount rates. As explained in the February 2021 SC-GHG TSD, the 
IWG has recommended that agencies revert to the same set of four values 
drawn from the SC-GHG distributions based on three discount rates as 
were used in regulatory analyses between 2010 and 2016 and were subject 
to public comment. For each discount rate, the IWG combined the 
distributions across models and socioeconomic emissions scenarios 
(applying equal weight to each) and then selected a set of four values 
recommended for use in benefit-cost analyses: an average value 
resulting from the model runs for each of three discount rates (2.5 
percent, 3 percent, and 5 percent), plus a fourth value, selected as 
the 95th percentile of estimates based on a 3 percent discount rate. 
The fourth value was included to provide information on potentially 
higher-than-expected economic impacts from climate change. As explained 
in the February 2021 SC-GHG TSD, and DOE agrees, this update reflects 
the immediate need to have an operational SC-GHG for use in regulatory 
benefit-cost analyses and other applications that was developed using a 
transparent process, peer-reviewed methodologies, and the science 
available at the time of that process. Those estimates were subject to 
public comment in the context of dozens of proposed rulemakings as well 
as in a dedicated public comment period in 2013.
    There are a number of limitations and uncertainties associated with 
the SC-GHG estimates. First, the current scientific and economic 
understanding of discounting approaches suggests discount rates 
appropriate for intergenerational analysis in the context of climate 
change are likely to be less than 3 percent, near 2 percent or 
lower.\154\ Second, the IAMs used to produce these interim estimates do 
not include all of the important physical, ecological, and economic 
impacts of climate change recognized in the climate change literature 
and the science underlying their ``damage functions''--i.e., the core 
parts of the IAMs that map global mean temperature changes and other 
physical impacts of climate change into economic (both market and 
nonmarket) damages--lags behind the most recent research. For example, 
limitations include the incomplete treatment of catastrophic and non-
catastrophic impacts in the integrated assessment models, their 
incomplete treatment of adaptation and technological change, the 
incomplete way in which inter-regional and intersectoral linkages are 
modeled,

[[Page 49133]]

uncertainty in the extrapolation of damages to high temperatures, and 
inadequate representation of the relationship between the discount rate 
and uncertainty in economic growth over long time horizons. Likewise, 
the socioeconomic and emissions scenarios used as inputs to the models 
do not reflect new information from the last decade of scenario 
generation or the full range of projections. The modeling limitations 
do not all work in the same direction in terms of their influence on 
the SC-CO2 estimates. However, as discussed in the February 
2021 TSD, the IWG has recommended that, taken together, the limitations 
suggest that the interim SC-GHG estimates used in this final rule 
likely underestimate the damages from GHG emissions. DOE concurs with 
this assessment.
---------------------------------------------------------------------------

    \154\ Interagency Working Group on Social Cost of Greenhouse 
Gases (IWG). 2021. Technical Support Document: Social Cost of 
Carbon, Methane, and Nitrous Oxide Interim Estimates under Executive 
Order 13990. February. United States Government. Available at 
www.whitehouse.gov/briefing-room/blog/2021/02/26/a-return-to-science-evidence-based-estimates-of-the-benefits-of-reducing-climate-pollution/ (last accessed May 1, 2023).
---------------------------------------------------------------------------

    DOE's derivations of the SC-CO2, SC-N2O, and 
SC-CH4 values used for this NOPR are discussed in the 
following sections, and the results of DOE's analyses estimating the 
benefits of the reductions in emissions of these GHGs are presented in 
section V.A.6 of this document.
a. Social Cost of Carbon
    The SC-CO2 values used for this NOPR were based on the 
values presented for the IWG's February 2021 TSD. Table IV.30 shows the 
updated sets of SC-CO2 estimates from the IWG's TSD in 5-
year increments from 2020 to 2050. The full set of annual values that 
DOE used is presented in appendix 14A of the NOPR TSD. For purposes of 
capturing the uncertainties involved in regulatory impact analysis, DOE 
has determined it is appropriate include all four sets of SC-
CO2 values, as recommended by the IWG.\155\
---------------------------------------------------------------------------

    \155\ For example, the February 2021 TSD discusses how the 
understanding of discounting approaches suggests that discount rates 
appropriate for intergenerational analysis in the context of climate 
change may be lower than 3 percent.

                     Table IV--Annual SC-CO2 Values from 2021 Interagency Update, 2020-2050
                                           [2020$ per Metric Ton CO2]
----------------------------------------------------------------------------------------------------------------
                                                                    Discount rate and statistic
                                                 ---------------------------------------------------------------
                                                        5%              3%             2.5%             3%
                      Year                       ---------------------------------------------------------------
                                                                                                       95th
                                                      Average         Average         Average       percentile
----------------------------------------------------------------------------------------------------------------
2020............................................              14              51              76             152
2025............................................              17              56              83             169
2030............................................              19              62              89             187
2035............................................              22              67              96             206
2040............................................              25              73             103             225
2045............................................              28              79             110             242
2050............................................              32              85             116             260
----------------------------------------------------------------------------------------------------------------

    For 2051 to 2070, DOE used SC-CO2 estimates published by 
EPA, adjusted to 2020$.\156\ These estimates are based on methods, 
assumptions, and parameters identical to the 2020-2050 estimates 
published by the IWG. DOE expects additional climate benefits to accrue 
for any longer-life consumer water heaters after 2070, but a lack of 
available SC-CO2 estimates for emissions years beyond 2070 
prevents DOE from monetizing these potential benefits in this analysis.
---------------------------------------------------------------------------

    \156\ See EPA, Revised 2023 and Later Model Year Light-Duty 
Vehicle GHG Emissions Standards: Regulatory Impact Analysis, 
Washington, DC, December 2021. Available at: nepis.epa.gov/Exe/ZyPDF.cgi?Dockey=P1013ORN.pdf (last accessed May 1, 2023).
---------------------------------------------------------------------------

    DOE multiplied the CO2 emissions reduction estimated for 
each year by the SC-CO2 value for that year in each of the 
four cases. DOE adjusted the values to 2022$ using the implicit price 
deflator for gross domestic product (``GDP'') from the Bureau of 
Economic Analysis. To calculate a present value of the stream of 
monetary values, DOE discounted the values in each of the four cases 
using the specific discount rate that had been used to obtain the SC-
CO2 values in each case.
b. Social Cost of Methane and Nitrous Oxide
    The SC-CH4 and SC-N2O values used for this 
NOPR were based on the values developed for the February 2021 TSD. 
Table IV.31 shows the updated sets of SC-CH4 and SC-
N2O estimates from the latest interagency update in 5-year 
increments from 2020 to 2050. The full set of annual values used is 
presented in appendix 14A of the NOPR TSD. To capture the uncertainties 
involved in regulatory impact analysis, DOE has determined it is 
appropriate to include all four sets of SC-CH4 and SC-
N2O values, as recommended by the IWG. DOE derived values 
after 2050 using the approach described above for the SC-
CO2.

                                                        Table IV--Annual SC-CH4 and SC-N2O Values From 2021 Interagency Update, 2020-2050
                                                                                     [2020$ per Metric Ton]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              SC-CH4                                                          SC-N2O
                                                                 -------------------------------------------------------------------------------------------------------------------------------
                                                                                    Discount rate and statistic                                     Discount rate and statistic
                                                                 -------------------------------------------------------------------------------------------------------------------------------
                              Year                                      5%              3%             2.5%             3%              5%               3             2.5%             3%
                                                                 -------------------------------------------------------------------------------------------------------------------------------
                                                                                                                       95th                                                            95th
                                                                      Average         Average         Average       percentile        Average         Average         Average       percentile
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2020............................................................             670            1500            2000            3900            5800           18000           27000           48000
2025............................................................             800            1700            2200            4500            6800           21000           30000           54000
2030............................................................             940            2000            2500            5200            7800           23000           33000           60000
2035............................................................            1100            2200            2800            6000            9000           25000           36000           67000
2040............................................................            1300            2500            3100            6700           10000           28000           39000           74000
2045............................................................            1500            2800            3500            7500           12000           30000           42000           81000

[[Page 49134]]

 
2050............................................................            1700            3100            3800            8200           13000           33000           45000           88000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    DOE multiplied the CH4 and N2O emissions 
reduction estimated for each year by the SC-CH4 and SC-
N2O estimates for that year in each of the cases. DOE 
adjusted the values to 2021$ using the implicit price deflator for 
gross domestic product (``GDP'') from the Bureau of Economic Analysis. 
To calculate a present value of the stream of monetary values, DOE 
discounted the values in each of the cases using the specific discount 
rate that had been used to obtain the SC-CH4 and SC-
N2O estimates in each case.
2. Monetization of Other Emissions Impacts
    For the NOPR, DOE estimated the monetized value of NOX 
and SO2 emissions reductions from electricity generation 
using the latest benefit per ton estimates for that sector from the 
EPA's Benefits Mapping and Analysis Program.\157\ DOE used EPA's values 
for PM2.5-related benefits associated with NOX 
and SO2 and for ozone-related benefits associated with 
NOX for 2025, 2030, and 2040, calculated with discount rates 
of 3 percent and 7 percent. DOE used linear interpolation to define 
values for the years not given in the 2025 to 2040 period; for years 
beyond 2040 the values are held constant. DOE combined the EPA benefit 
per ton estimates with regional information on electricity consumption 
and emissions to define weighted-average national values for 
NOX and SO2 as a function of sector (see appendix 
14B of the NOPR TSD).
---------------------------------------------------------------------------

    \157\ Estimating the Benefit per Ton of Reducing 
PM2.5 Precursors from 21 Sectors. Available at: 
www.epa.gov/benmap/estimating-benefit-ton-reducing-pm25-precursors-21-sectors (last accessed May 1, 2023).
---------------------------------------------------------------------------

    DOE also estimated the monetized value of NOX and 
SO2 emissions reductions from site use of natural gas, LPG 
and fuel oil in consumer water heaters using benefit-per-ton estimates 
from the EPA's Benefits Mapping and Analysis Program. Although none of 
the sectors covered by EPA refers specifically to residential and 
commercial buildings, the sector called ``area sources'' would be a 
reasonable proxy for residential and commercial buildings.\158\ The EPA 
document provides high and low estimates for 2025 and 2030 at 3- and 7-
percent discount rates.\159\ DOE used the same linear interpolation and 
extrapolation as it did with the values for electricity generation.
---------------------------------------------------------------------------

    \158\ ``Area sources'' represents all emission sources for which 
states do not have exact (point) locations in their emissions 
inventories. Because exact locations would tend to be associated 
with larger sources, ``area sources'' would be fairly representative 
of small, dispersed sources like homes and businesses.
    \159\ ``Area sources'' are a category in the 2018 document from 
EPA, but are not used in the 2021 document cited above. See: 
www.epa.gov/sites/default/files/2018-02/documents/sourceapportionmentbpttsd_2018.pdf.
---------------------------------------------------------------------------

    DOE multiplied the site emissions reduction (in tons) in each year 
by the associated $/ton values, and then discounted each series using 
discount rates of 3 percent and 7 percent as appropriate.

M. Trial Standard Levels

    In general, DOE typically evaluates potential amended standards for 
products and equipment by grouping individual efficiency levels for 
each class into TSLs. Use of TSLs allows DOE to identify and consider 
manufacturer cost interactions between the product classes, to the 
extent that there are such interactions, and market cross elasticity 
from consumer purchasing decisions that may change when different 
standard levels are set. For consumer water heaters, it is particularly 
important to look at the aggregated impacts as characterized by TSLs 
due to the changes in consumer purchasing decisions as a result of the 
increased product and installation costs that impact the shipments 
model. The changes to the shipments model will drive differential 
national impacts both on the consumer and manufacturer side that are 
more realistic of how the market may change in response to amended DOE 
standards.
    In the analysis conducted for this NOPR, DOE analyzed the benefits 
and burdens of six TSLs for consumer water heaters. DOE developed TSLs 
that combine efficiency levels for each analyzed product class. DOE 
presents the results for the TSLs in this document, while the results 
for all efficiency levels that DOE analyzed are in the NOPR TSD.
    Table IV.32 presents the TSLs and the corresponding efficiency 
levels that DOE has identified for potential amended energy 
conservation standards for consumer water heaters. TSL 6 represents the 
maximum technologically feasible (``max-tech'') energy efficiency for 
all product classes. TSL 5 represents the highest efficiency level for 
each product class with a positive NPV at 7 percent discount rate for 
all product classes. For gas-fired gas storage water heater, the NPV at 
7 percent discount rate is negative from EL 3 to EL 5. Therefore, TSL 5 
is constructed by reducing the efficiency level for gas-fired storage 
water heaters (i.e., EL 2) and with the same efficiency level for all 
other product class compared to the max-tech. TSL 4 represents the 
highest efficiency level for each product class with the maximum NPV at 
7 percent discount rate for all product classes. Therefore, TSL 4 is 
constructed by reducing the efficiency level for electric storage water 
heaters (i.e., EL 2) and gas-fired instantaneous water heaters (i.e., 
EL 3). TSL 3 represents an interim energy efficiency level between the 
joint stakeholder recommendation (i.e., TSL 2) and TSL 4. TSL 2 
represents the joint stakeholder recommendation. Finally, because EL 1 
is the lowest analyzed efficiency level above baseline, TSL 1 is 
constructed with EL 1 for all product classes, except for electric 
storage water heaters (20 gal <= Veff <=55 gal) which is set 
equal to the current standard level.

[[Page 49135]]



                                               Table IV--Trial Standard Levels for Consumer Water Heaters
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                               Trial standard level
                      Product class                      -----------------------------------------------------------------------------------------------
                                                                 1               2               3               4               5               6
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Efficiency level
--------------------------------------------------------------------------------------------------------------------------------------------------------
Gas-fired Storage Water Heaters (20 gal <= Veff <=55                   1               2               2               2               2               5
 gal)...................................................
Oil-fired Storage Water Heaters (Veff <=50 gal).........               1               2               2               2               2               2
Small electric storage water heaters (20 gal <= Veff                   0               0               1               1               1               1
 <=35 gal and FHR <51 gal)..............................
Electric Storage Water Heaters (20 gal <= Veff <=55 gal,               0               1               1               2               3               3
 excluding small electric storage water heaters)........
Electric Storage Water Heaters (55 gal < Veff <=120 gal)               1               1               1               2               3               3
Gas-fired Instantaneous Water Heaters (Veff <2 gal,                    1               2               2               3               4               4
 Rated Input >50,000 Btu/h).............................
--------------------------------------------------------------------------------------------------------------------------------------------------------

    DOE constructed the TSLs for this NOPR to include ELs 
representative of ELs with similar characteristics (i.e., using similar 
technologies and/or efficiencies, and having roughly comparable 
equipment availability). The use of representative ELs provided for 
greater distinction between the TSLs. While representative ELs were 
included in the TSLs, DOE considered all efficiency levels as part of 
its analysis.\160\
---------------------------------------------------------------------------

    \160\ Efficiency levels that were analyzed for this NOPR are 
discussed in section IV.C.4 of this document. Results by efficiency 
level are presented in TSD chapters 8, 10, and 12.
---------------------------------------------------------------------------

    Rheem recommended that DOE separately analyze the ELs by draw 
pattern and refrain from proposing a single EL across all draw patterns 
unless that EL is economically justified for each draw pattern 
individually. (Rheem, No. 45 at p. 4) Atmos also recommended that the 
DOE consider EL life-cycle cost evaluations independently as TSLs for 
competing consumer water heating options, rather than grouping ELs and, 
thus, combining costs and benefits. Atmos stated that the current 
approach of grouping ELs appears to average away the distinctions in EL 
life-cycle cost performance and that the grouping of diversely 
performing ELs is likely to result in distortions in the representation 
of TSLs. (Atmos, No. 38 at p. 5)
    DOE typically evaluates potential amended standards for products 
and equipment at the product class level and by grouping select 
individual efficiency levels for each class into TSLs. Use of TSLs 
allows DOE to identify and consider industry-level manufacturer cost 
interactions between the product classes, to the extent that there are 
such interactions, and national-level market cross-elasticity from 
consumer purchasing decisions that may change when different standard 
levels are set. For consumer water heaters, it is particularly 
important to look at the aggregated impacts as characterized by TSLs 
due to the changes in consumer purchasing decisions as a result of the 
increased product and installation costs that impact the shipments 
model. The changes to the shipments model will drive differential 
national impacts both on the consumer and manufacturer side that are 
more realistic of how the market may change in response to amended DOE 
standards. DOE notes that its engineering analysis results in TSLs that 
are prescribed across multiple efficiency levels and draw patterns; 
proposing a separate efficiency level for each draw pattern would not 
significantly influence the resulting TSL. DOE proposes efficiency 
levels across draw patterns to ensure calculated energy savings for 
consumers if manufacturers change the draw patterns of their products, 
which was previously observed as a result of standards prescribed for 
gas-fired and electric storage water heaters larger than 55 gallons. In 
other words, although each draw pattern constitutes a separate product 
class in the regulations, in this analysis DOE did not make that 
distinction (for example, gas-fired storage water heaters 20-55 gallons 
is treated as a single group rather than four product classes for the 
four draw patterns). Although DOE presents the results in terms of 
TSLs, DOE analyzes and evaluates all possible ELs for each product 
class in its analysis. Additionally, DOE notes that although a single 
EL may be proposed for multiple draw patterns, the resultant energy 
conservation standards equations are different for each draw pattern.

N. Utility Impact Analysis

    The utility impact analysis estimates the changes in installed 
electrical capacity and generation projected to result for each 
considered TSL. The analysis is based on published output from the NEMS 
associated with AEO2023. NEMS produces the AEO Reference case, as well 
as a number of side cases that estimate the economy-wide impacts of 
changes to energy supply and demand. For the current analysis, impacts 
are quantified by comparing the levels of electricity sector 
generation, installed capacity, fuel consumption and emissions in the 
AEO2023 Reference case and various side cases. Details of the 
methodology are provided in the appendices to chapters 13 and 15 of the 
NOPR TSD.
    The output of this analysis is a set of time-dependent coefficients 
that capture the change in electricity generation, primary fuel 
consumption, installed capacity and power sector emissions due to a 
unit reduction in demand for a given end use. These coefficients are 
multiplied by the stream of electricity savings calculated in the NIA 
to provide estimates of selected utility impacts of potential new or 
amended energy conservation standards.
    NEEA, ACEEE, and NWPCC stated that the connectivity components of 
the electric water heaters including HPWHs, may have less impact on 
site electricity use but are critical to the ability to compare 
products for their grid value, including primary and full fuel cycle 
energy use. NEEA, ACEEE, and NWPCC encourage DOE to add a definition of 
connectivity to the performance standard and calculate the value that a

[[Page 49136]]

connected water heater offers to the electric grid. (NEEA, ACEEE, and 
NWPCC, No. 47 at p. 10) DOE agrees that connectivity features on 
electric water heaters can have an impact on the electric grid. The 
current efficiency levels DOE is proposing do not include any design 
requirement for electric water heaters to have connectivity features. 
DOE therefore did not calculate the value that a connected water heater 
offers to the electric grid for this rulemaking.

O. Employment Impact Analysis

    DOE considers employment impacts in the domestic economy as one 
factor in selecting a proposed standard. Employment impacts from new or 
amended energy conservation standards include both direct and indirect 
impacts. Direct employment impacts are any changes in the number of 
employees of manufacturers of the products subject to standards, their 
suppliers, and related service firms. The MIA addresses those impacts. 
Indirect employment impacts are changes in national employment that 
occur due to the shift in expenditures and capital investment caused by 
the purchase and operation of more-efficient appliances. Indirect 
employment impacts from standards consist of the net jobs created or 
eliminated in the national economy, other than in the manufacturing 
sector being regulated, caused by (1) reduced spending by consumers on 
energy, (2) reduced spending on new energy supply by the utility 
industry, (3) increased consumer spending on the products to which the 
new standards apply and other goods and services, and (4) the effects 
of those three factors throughout the economy.
    One method for assessing the possible effects on the demand for 
labor of such shifts in economic activity is to compare sector 
employment statistics developed by the Labor Department's Bureau of 
Labor Statistics (``BLS''). BLS regularly publishes its estimates of 
the number of jobs per million dollars of economic activity in 
different sectors of the economy, as well as the jobs created elsewhere 
in the economy by this same economic activity. Data from BLS indicate 
that expenditures in the utility sector generally create fewer jobs 
(both directly and indirectly) than expenditures in other sectors of 
the economy.\161\ There are many reasons for these differences, 
including wage differences and the fact that the utility sector is more 
capital-intensive and less labor-intensive than other sectors. Energy 
conservation standards have the effect of reducing consumer utility 
bills. Because reduced consumer expenditures for energy likely lead to 
increased expenditures in other sectors of the economy, the general 
effect of efficiency standards is to shift economic activity from a 
less labor-intensive sector (i.e., the utility sector) to more labor-
intensive sectors (e.g., the retail and service sectors). Thus, the BLS 
data suggest that net national employment may increase due to shifts in 
economic activity resulting from energy conservation standards.
---------------------------------------------------------------------------

    \161\ See U.S. Department of Commerce--Bureau of Economic 
Analysis. Regional Multipliers: A User Handbook for the Regional 
Input-Output Modeling System (RIMS II). 1997. U.S. Government 
Printing Office: Washington, DC. Available at www.bea.gov/resources/methodologies/RIMSII-user-guide (last accessed April 1, 2023).
---------------------------------------------------------------------------

    DOE estimated indirect national employment impacts for the standard 
levels considered in this NOPR using an input/output model of the U.S. 
economy called Impact of Sector Energy Technologies version 4 
(``ImSET'').\162\ ImSET is a special-purpose version of the ``U.S. 
Benchmark National Input-Output'' (``I-O'') model, which was designed 
to estimate the national employment and income effects of energy-saving 
technologies. The ImSET software includes a computer-based I-O model 
having structural coefficients that characterize economic flows among 
187 sectors most relevant to industrial, commercial, and residential 
building energy use.
---------------------------------------------------------------------------

    \162\ Livingston, O.V., S.R. Bender, M.J. Scott, and R.W. 
Schultz. ImSET 4.0: Impact of Sector Energy Technologies Model 
Description and User Guide. 2015. Pacific Northwest National 
Laboratory: Richland, WA. PNNL-24563. Available at www.pnnl.gov/main/publications/external/technical_reports/PNNL-24563.pdf (last 
accessed May 1, 2023).
---------------------------------------------------------------------------

    DOE notes that ImSET is not a general equilibrium forecasting 
model, and that the uncertainties involved in projecting employment 
impacts, especially changes in the later years of the analysis. Because 
ImSET does not incorporate price changes, the employment effects 
predicted by ImSET may over-estimate actual job impacts over the long 
run for this rule. Therefore, DOE used ImSET only to generate results 
for near-term timeframes (2030-2035), where these uncertainties are 
reduced. For more details on the employment impact analysis, see 
chapter 16 of the NOPR TSD.

V. Analytical Results and Conclusions

    The following section addresses the results from DOE's analyses 
with respect to the considered energy conservation standards for 
consumer water heaters. It addresses the TSLs examined by DOE, the 
projected impacts of each of these levels if adopted as energy 
conservation standards for consumer water heaters, and the standards 
levels that DOE is proposing to adopt in this NOPR. Additional details 
regarding DOE's analyses are contained in the NOPR TSD supporting this 
document.

A. Economic Justification and Energy Savings

1. Economic Impacts on Individual Consumers
    DOE analyzed the economic impacts of consumer water heaters on 
consumers by looking at the effects that potential amended standards at 
each TSL would have on the LCC and PBP. DOE also examined the impacts 
of potential standards on selected consumer subgroups. These analyses 
are discussed in the following sections.
a. Life-Cycle Cost and Payback Period
    In general, higher-efficiency products affect consumers in two 
ways: (1) purchase price increases and (2) annual operating costs 
decrease. Inputs used for calculating the LCC and PBP include total 
installed costs (i.e., product price plus installation costs), and 
operating costs (i.e., annual energy use, energy prices, energy price 
trends, repair costs, and maintenance costs). The LCC calculation also 
uses product lifetime and a discount rate. Chapter 8 of the NOPR TSD 
provides detailed information on the LCC and PBP analyses.
    Table V.1 through Table V.12 show the LCC and PBP results for the 
TSLs considered for each product class. In the first of each pair of 
tables, the simple payback is measured relative to the baseline 
product. In the second table, impacts are measured relative to the 
efficiency distribution in the no-new-standards case in the compliance 
year (see section IV.F.8 of this document). Because some consumers 
purchase products with higher efficiency in the no-new-standards case, 
the average savings are less than the difference between the average 
LCC of the baseline product and the average LCC at each TSL. The 
savings refer only to consumers who are affected by a standard at a 
given TSL. Those who already purchase a product with efficiency at or 
above a given TSL are not affected. Consumers for whom the LCC 
increases at a given TSL experience a net cost.

[[Page 49137]]



                                       Table V.1--Average LCC and PBP Results for Gas-Fired Storage Water Heaters
                                                                [20 gal <= Veff <=55 gal]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Average costs (2022$)
                                                                           ----------------------------------------------------
                                                                                            First                                  Simple      Average
                    TSL                            Efficiency level          Installed      year's      Lifetime                  payback      lifetime
                                                                                cost      operating    operating       LCC        (years)      (years)
                                                                                             cost         cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.........................................  0.............................        1,524          265        3.090        4,614           NA         14.5
1.........................................  1.............................        1,566          259        3,030        4,596          8.1         14.5
2,3,4,5...................................  2.............................        1,668          246        2,888        4,556          7.9         14.5
6.........................................  5.............................        2,325          216        2,583        4,908         16.4         14.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The results for each TSL are calculated assuming that all consumers use products at that efficiency level. The PBP is measured relative to the
  baseline product.


    Table V.2--Average LCC Savings Relative to the No-New-Standards Case for Gas-Fired Storage Water Heaters
                                            [20 gal <= Veff <=55 gal]
----------------------------------------------------------------------------------------------------------------
                                                                          Life-cycle cost savings
                                            Efficiency   -------------------------------------------------------
                   TSL                         level       Average LCC savings \*\    Percent of consumers that
                                                                   (2022$)               experience net cost
----------------------------------------------------------------------------------------------------------------
1.......................................               1                        17                            22
2,3,4,5.................................               2                        52                            36
6.......................................               5                     (247)                            70
----------------------------------------------------------------------------------------------------------------
* The savings represent the average LCC for affected consumers.


                                       Table V.3--Average LCC and PBP Results for Oil-Fired Storage Water Heaters
                                                                     [Veff <=50 gal]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Average costs (2022$)
                                                                           ----------------------------------------------------
                                                                                            First                                  Simple      Average
                    TSL                            Efficiency level          Installed      year's      Lifetime                  payback      lifetime
                                                                                cost      operating    operating       LCC        (years)      (years)
                                                                                             cost         cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.........................................  0.............................        4,120          844        9,069       13,189           NA         15.5
1.........................................  1.............................        4,216          822        8,828       13,044          4.4         15.5
2,3,4,5,6.................................  2.............................        4,394          801        8,600       12,994          6.4         15.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The results for each TSL are calculated assuming that all consumers use products at that efficiency level. The PBP is measured relative to the
  baseline product.


    Table V.4--Average LCC Savings Relative to the No-New-Standards Case for Oil-Fired Storage Water Heaters
                                                 [Veff <=50 gal]
----------------------------------------------------------------------------------------------------------------
                                                                          Life-cycle cost savings
                                            Efficiency   -------------------------------------------------------
                   TSL                         level       Average LCC savings \*\    Percent of consumers that
                                                                   (2022$)               experience net cost
----------------------------------------------------------------------------------------------------------------
1.......................................               1                       145                             9
2,3,4,5,6...............................               2                       165                            25
----------------------------------------------------------------------------------------------------------------
* The savings represent the average LCC for affected consumers.


                                     Table V.5--Average LCC and PBP Results for Small Electric Storage Water Heaters
                                                        [20 gal <= Veff <=35 gal and FHR <51 gal]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Average costs (2022$)
                                                                           ----------------------------------------------------
                                                                                            First                                  Simple      Average
                    TSL                            Efficiency level          Installed      year's      Lifetime                  payback      lifetime
                                                                                cost      operating    operating       LCC        (years)      (years)
                                                                                             cost         cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
1,2.......................................  0.............................          841          386        4,481        5,322           NA         15.1

[[Page 49138]]

 
3,4,5,6...................................  1.............................        2,385          210        2,520        4,905          8.8         15.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The results for each TSL are calculated assuming that all consumers use products at that efficiency level. The PBP is measured relative to the
  baseline product.


  Table V.6--Average LCC Savings Relative to the No-New-Standards Case for Small Electric Storage Water Heaters
                                    [20 gal <= Veff <=35 gal and FHR <51 gal]
----------------------------------------------------------------------------------------------------------------
                                                                          Life-cycle cost savings
                                            Efficiency   -------------------------------------------------------
                   TSL                         level       Average LCC savings \*\    Percent of consumers that
                                                                   (2022$)               experience net cost
----------------------------------------------------------------------------------------------------------------
1,2.....................................               0                        NA                             0
3,4,5,6.................................               1                       418                            56
----------------------------------------------------------------------------------------------------------------
* The savings represent the average LCC for affected consumers.


                                        Table V.7--Average LCC and PBP Results for Electric Storage Water Heaters
                                        [20 gal <= Veff <=55 gal, excluding small electric storage water heaters]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Average costs (2022$)
                                                                           ----------------------------------------------------
                                                                                            First                                  Simple      Average
                    TSL                            Efficiency level          Installed      year's      Lifetime                  payback      lifetime
                                                                                cost      operating    operating       LCC        (years)      (years)
                                                                                             cost         cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.........................................  0.............................          947          463        5,301        6,248           NA         15.1
2,3.......................................  1.............................        1,670          225        2,669        4,339          3.0         15.1
4.........................................  2.............................        1,713          182        2,195        3,908          2.7         15.1
5,6.......................................  3.............................        1,831          170        2,060        3,892          3.0         15.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The results for each TSL are calculated assuming that all consumers use products at that efficiency level. The PBP is measured relative to the
  baseline product.


     Table V.8--Average LCC Savings Relative to the No-New-Standards Case for Electric Storage Water Heaters
                    [20 gal <= Veff <=55 gal, excluding small electric storage water heaters]
----------------------------------------------------------------------------------------------------------------
                                                                          Life-cycle cost savings
                                            Efficiency   -------------------------------------------------------
                   TSL                         level       Average LCC savings \*\    Percent of consumers that
                                                                   (2022$)               experience net cost
----------------------------------------------------------------------------------------------------------------
1,2.....................................               0                        NA                             0
2,3.....................................               1                     1,868                            25
4.......................................               2                     2,283                            23
5,6.....................................               3                     2,101                            30
----------------------------------------------------------------------------------------------------------------
* The savings represent the average LCC for affected consumers.


                                        Table V.9--Average LCC and PBP Results for Electric Storage Water Heaters
                                                                [55 gal < Veff <=120 gal]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Average costs (2022$)
                                                                           ----------------------------------------------------
                                                                                            First                                  Simple      Average
                    TSL                            Efficiency level          Installed      year's      Lifetime                  payback      lifetime
                                                                                cost      operating    operating       LCC        (years)      (years)
                                                                                             cost         cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.........................................  0.............................        2,013          285        3,347        5,361           NA         15.1
1,2,3.....................................  1.............................        2,024          239        2,835        4,858          0.2         15.1
4.........................................  2.............................        2,052          190        2,283        4,335          0.4         15.1

[[Page 49139]]

 
5,6.......................................  3.............................        2,178          172        2,082        4,260          1.5         15.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The results for each TSL are calculated assuming that all consumers use products at that efficiency level. The PBP is measured relative to the
  baseline product.


    Table V.10--Average LCC Savings Relative to the No-New-Standards Case for Electric Storage Water Heaters
                                            [55 gal < Veff <=120 gal]
----------------------------------------------------------------------------------------------------------------
                                                                          Life-cycle cost savings
                                            Efficiency   -------------------------------------------------------
                   TSL                         level       Average LCC savings \*\    Percent of consumers that
                                                                   (2022$)               experience net cost
----------------------------------------------------------------------------------------------------------------
1,2,3...................................               1                       501                           0.2
4.......................................               2                       599                             1
5,6.....................................               3                       170                            42
----------------------------------------------------------------------------------------------------------------
* The savings represent the average LCC for affected consumers.


                                    Table V.11--Average LCC and PBP Results for Gas-Fired Instantaneous Water Heaters
                                                        [Veff <2 gal, rated input >50,000 Btu/h]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Average costs (2022$)
                                                                           ----------------------------------------------------
                                                                                            First                                  Simple      Average
                    TSL                            Efficiency level          Installed      year's      Lifetime                  payback      lifetime
                                                                                cost      operating    operating       LCC        (years)      (years)
                                                                                             cost         cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.........................................  0.............................        2,320          262        3,846        6,166           NA         20.0
1.........................................  1.............................        2,424          248        3,665        6,089          7.3         20.0
2,3.......................................  2.............................        2,447          240        3,556        6,004          5.9         20.0
4.........................................  3.............................        2,465          237        3,509        5,975          5.9         20.0
5,6.......................................  4.............................        2,493          234        3,468        5,962          6.3         20.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The results for each TSL are calculated assuming that all consumers use products at that efficiency level. The PBP is measured relative to the
  baseline product.


 Table V.12--Average LCC Savings Relative to the No-New-Standards Case for Gas-Fired Instantaneous Water Heaters
                                    [Veff <2 gal, rated input >50,000 Btu/h]
----------------------------------------------------------------------------------------------------------------
                                                                          Life-cycle cost savings
                                            Efficiency   -------------------------------------------------------
                   TSL                         level       Average LCC savings \*\    Percent of consumers that
                                                                   (2022$)               experience net cost
----------------------------------------------------------------------------------------------------------------
1.......................................               1                        66                            13
2,3.....................................               2                       135                            13
4.......................................               3                        89                            29
5,6.....................................               4                        95                            36
----------------------------------------------------------------------------------------------------------------
* The savings represent the average LCC for affected consumers.

b. Consumer Subgroup Analysis
    In the consumer subgroup analysis, DOE estimated the impact of the 
considered TSLs on low-income households, senior-only households, and 
small businesses. Table V.13 through Table V.18 compare the average LCC 
savings and PBP at each efficiency level for the consumer subgroups 
with similar metrics for the entire consumer sample for each consumer 
water heater product class analyzed. In most cases, the average LCC 
savings and PBP for low-income households and senior-only households at 
the considered efficiency levels are not substantially different from 
the average for all households. Chapter 11 of the NOPR TSD presents the 
complete LCC and PBP results for the subgroups.

[[Page 49140]]



Table V.13--Comparison of LCC Savings and PBP for Consumer Subgroups and All Households; Gas-Fired Storage Water
                                                     Heaters
                                            [20 gal <= Veff <=55 gal]
----------------------------------------------------------------------------------------------------------------
                                                    Low-income      Senior-only        Small
                                                    households      households      businesses    All households
----------------------------------------------------------------------------------------------------------------
Average LCC savings (2022$)
    TSL 1.......................................              44              28            (18)              17
    2,3,4,5.....................................             137              89            (49)              52
    6...........................................             192           (257)           (527)           (247)
Simple Payback Period (years)
    TSL 1.......................................             3.2             6.9              11             8.1
    2,3,4,5.....................................             3.1             6.6             9.7             7.9
    6...........................................             6.9              19              17              16
Consumers with Net Cost (%)
    TSL 1.......................................               8              19              44              22
    2,3,4,5.....................................              13              29              66              36
    6...........................................              31              64              82              70
Consumers with Net Benefit (%)
    TSL 1.......................................              40              33              11              34
    2,3,4,5.....................................              56              42              12              42
    6...........................................              58              30              18              29
----------------------------------------------------------------------------------------------------------------


Table V.14--Comparison of LCC Savings and PBP for Consumer Subgroups and All Households; Oil-Fired Storage Water
                                                     Heaters
                                                 [Veff <=50 gal]
----------------------------------------------------------------------------------------------------------------
                                                    Low-income      Senior-only        Small
                                                    households      households      businesses    All households
----------------------------------------------------------------------------------------------------------------
Average LCC Savings (2022$)
    TSL 1.......................................             186             158              21             145
    2,3,4,5,6...................................             307             205            (46)             165
Simple Payback Period (years)
    TSL 1.......................................             1.2             3.9             5.4             4.4
    2,3,4,5,6...................................             1.9             5.6             7.8             6.4
Consumers with Net Cost (%)
    TSL 1.......................................               2               5              22               9
    2,3,4,5,6...................................               5              16              61              25
Consumers with Net Benefit (%)
    TSL 1.......................................              60              60              45              58
    2,3,4,5,6...................................              71              66              23              58
----------------------------------------------------------------------------------------------------------------


 Table V.15--Comparison of LCC Savings and PBP for Consumer Subgroups and All Households; Small Electric Storage
                                                  Water Heaters
                                    [20 gal <= Veff <=35 gal and FHR <51 gal]
----------------------------------------------------------------------------------------------------------------
                                                    Low-income      Senior-only        Small
                                                    households      households      businesses    All households
----------------------------------------------------------------------------------------------------------------
Average LCC Savings (2022$)
    TSL 1,2 *...................................              NA              NA              NA              NA
    2,3,4,5,6...................................           1,481              69         (1,196)             418
Simple Payback Period (years)
    TSL 1,2 *...................................              NA              NA              NA              NA
    2,3,4,5,6...................................             3.5              10              23             8.8
Consumers with Net Cost (%)
    TSL 1,2 *...................................              NA              NA              NA              NA
    2,3,4,5,6...................................              20              47              89              56
Consumers with Net Benefit (%)
    TSL 1,2 *...................................              NA              NA              NA              NA
    2,3,4,5,6...................................              71              47              10              43
----------------------------------------------------------------------------------------------------------------
* TSLs 1 and 2 represent no new amended standards for small electric storage water heaters.


[[Page 49141]]


 Table V.16--Comparison of LCC Savings and PBP for Consumer Subgroups and All Households; Electric Storage Water
                                                     Heaters
                     [20 gal <= Veff <=55 gal, except small electric storage water heaters]
----------------------------------------------------------------------------------------------------------------
                                                    Low-income      Senior-only        Small
                                                    households      households      businesses    All households
----------------------------------------------------------------------------------------------------------------
Average LCC Savings (2022$)
    TSL 1.......................................              NA              NA              NA              NA
     2,3........................................           2,475           1,018             556           1,868
     4..........................................           2,943           1,270             707           2,283
     5,6........................................           2,773           1,149             566           2,101
Simple Payback Period (years)
    TSL 1.......................................              NA              NA              NA              NA
     2,3........................................             1.3             3.9             3.4             3.0
     4..........................................             1.2             3.5             3.2             2.7
     5,6........................................             1.3             3.9             3.6             3.0
Consumers with Net Cost (%)
    TSL 1.......................................             0.0             0.0             0.0             0.0
     2,3........................................             9.9              24              62              25
     4..........................................             9.0              23              61              23
     5,6........................................              12              29              70              30
Consumers with Net Benefit (%)
    TSL 1.......................................               0               0               0               0
     2,3........................................              69              54              25              62
     4..........................................              71              56              26              64
     5,6........................................              76              57              26              65
----------------------------------------------------------------------------------------------------------------


 Table V.17--Comparison of LCC Savings and PBP for Consumer Subgroups and All Households; Electric Storage Water
                                                     Heaters
                                            [55 gal < Veff <=120 gal]
----------------------------------------------------------------------------------------------------------------
                                                    Low-income      Senior-only        Small
                                                    households      households      businesses    All households
----------------------------------------------------------------------------------------------------------------
Average LCC Savings (2022$)
    TSL 1,2,3...................................             474             479             336             501
     4..........................................             674             488             291             599
     5,6........................................             270              89              25             170
Simple Payback Period (years)
    TSL 1,2,3...................................             0.1             0.3             0.3             0.2
     4..........................................             0.2             0.6             0.5             0.4
     5,6........................................             0.7             2.2             1.6             1.5
Consumers with Net Cost (%)
    TSL 1,2,3...................................             0.0             0.1             1.6             0.2
     4..........................................             0.1             1.1             7.7             1.2
     5,6........................................              19              47              70              42
Consumers with Net Benefit (%)
     TSL 1,2,3..................................             4.3             2.4             1.7             2.8
     4..........................................              15              12             7.0              13
     5,6........................................              65              36              20              46
----------------------------------------------------------------------------------------------------------------


Table V.18--Comparison of LCC Savings and PBP for Consumer Subgroups and All Households; Gas-Fired Instantaneous
                                                  Water Heaters
                                    [Veff <2 gal, rated input >50,000 Btu/h]
----------------------------------------------------------------------------------------------------------------
                                                    Low-income      Senior-only        Small
                                                    households      households      businesses    All households
----------------------------------------------------------------------------------------------------------------
Average LCC Savings (2022$)
     TSL 1......................................             109               4              41              66
     2,3........................................             158              58              95             135
     4..........................................             108              41              68              89
     5,6........................................             125              37              65              95
Simple Payback Period (years)
     TSL 1......................................             4.9            10.9             5.0             7.3
     2,3........................................             4.1             8.7             4.0             5.9
     4..........................................             4.1             8.6             3.8             5.9
     5,6........................................             4.3             9.2             4.1             6.3
Consumers with Net Cost (%)
     TSL 1......................................             7.7              13              18              13
     2,3........................................             7.2              14              22              13
     4..........................................              17              32              45              29

[[Page 49142]]

 
     5,6........................................              19              42              53              36
Consumers with Net Benefit (%)
    TSL 1.......................................              22              15              13              17
     2,3........................................              32              22              18              24
     4..........................................              62              49              39              55
     5,6........................................              67              46              39              55
----------------------------------------------------------------------------------------------------------------

c. Rebuttable Presumption Payback
    As discussed in section III.E.2, EPCA establishes a rebuttable 
presumption that an energy conservation standard is economically 
justified if the increased purchase cost for a product that meets the 
standard is less than three times the value of the first-year energy 
savings resulting from the standard. In calculating a rebuttable 
presumption payback period for each of the considered TSLs, DOE used 
discrete values, and, as required by EPCA, based the energy use 
calculation on the DOE test procedure for consumer water heaters. In 
contrast, the PBPs presented in section V.B.1.a were calculated using 
distributions that reflect the range of energy use in the field.
    Table V.19 presents the rebuttable-presumption payback periods for 
the considered TSLs for consumer water heaters. While DOE examined the 
rebuttable-presumption criterion, it considered whether the standard 
levels considered for the NOPR are economically justified through a 
more detailed analysis of the economic impacts of those levels, 
pursuant to 42 U.S.C. 6295(o)(2)(B)(i), that considers the full range 
of impacts to the consumer, manufacturer, Nation, and environment. The 
results of that analysis serve as the basis for DOE to definitively 
evaluate the economic justification for a potential standard level, 
thereby supporting or rebutting the results of any preliminary 
determination of economic justification.

                                                   Table V.19--Rebuttable-Presumption Payback Periods
--------------------------------------------------------------------------------------------------------------------------------------------------------
                           TSL                                   1               2               3               4               5               6
--------------------------------------------------------------------------------------------------------------------------------------------------------
GSWH....................................................             6.6             6.4             6.4             6.4             6.4            10.8
OSWH....................................................             4.2             6.1             6.1             6.1             6.1             6.1
ESWH (20 gal <= Veff <=35 gal, FHR < 51 gal)............              NA              NA             8.4             8.4             8.4             8.4
ESWH (20 gal <= Veff <=55 gal, excluding small ESWH)....              NA             2.3             3.3             2.9             2.9             3.2
ESWH (55 gal < Veff <=120 gal)..........................             0.3             0.3             0.3             0.5             1.5             1.5
GIWH....................................................            11.7             8.5             8.5             8.5             8.3             8.3
--------------------------------------------------------------------------------------------------------------------------------------------------------

2. Economic Impacts on Manufacturers
    DOE performed an MIA to estimate the impact of amended energy 
conservation standards on manufacturers of consumer water heaters. The 
following section describes the expected impacts on manufacturers at 
each considered TSL. Chapter 12 of the NOPR TSD explains the analysis 
in further detail.
a. Industry Cash Flow Analysis Results
    In this section, DOE provides GRIM results from the analysis, which 
examines changes in the industry that would result from a standard. The 
following tables summarize the estimated financial impacts (represented 
by changes in INPV) of potential amended energy conservation standards 
on manufacturers of consumer water heaters, as well as the conversion 
costs that DOE estimates manufacturers of consumer water heaters would 
incur at each TSL.
    As discussed in section IV.J.2.d of this document, DOE modeled two 
scenarios to evaluate a range of cash flow impacts on the consumer 
water heater industry: (1) the preservation of gross margin percentage 
scenario and (2) the preservation of operating profit. Under the 
preservation of gross margin percentage scenario, DOE applied a single 
uniform ``gross margin percentage'' across all efficiency levels. As 
MPCs increase with efficiency, this scenario implies that the absolute 
dollar markup will increase. DOE assumed a manufacturer ``gross margin 
percentage'' of 31% for gas-fired storage water heaters, 30% for oil-
fired storage water heaters, 28% for all electric storage water 
heaters, and 45% for gas-fired instantaneous water heaters. This 
manufacturer markup is the same as the one DOE assumed in the 
engineering analysis and the no-new-standards case of the GRIM. Because 
this scenario assumes that a manufacturer's absolute dollar markup 
would increase as MPCs increase in the standards cases, it represents 
the upper-bound to industry profitability under potential new energy 
conservation standards.
    The preservation of operating profit scenario reflects 
manufacturers' concerns about their inability to maintain margins as 
MPCs increase to reach more-stringent efficiency levels. In this 
scenario, while manufacturers make the necessary investments required 
to convert their facilities to produce compliant products, operating 
profit does not change in absolute dollars and decreases as a 
percentage of revenue.
    Each of the modeled manufacturer markup scenarios results in a 
unique set of cash-flows and corresponding industry values at each TSL. 
In the following discussion, the INPV results refer to the difference 
in industry value between the no-new-standards case and each standards 
case resulting from the sum of discounted cash-flows from 2023 through 
2059. To provide perspective

[[Page 49143]]

on the short-run cash-flow impact, DOE includes in the discussion of 
results a comparison of free cash flow between the no-new-standards 
case and the standards case at each TSL in the year before new 
standards are required.

                   Table V.20--Manufacturer Impact Analysis for Consumer Water Heaters Under the Preservation of Gross Margin Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 No-new-                               Trial standard level *
                                               Units            standards  -----------------------------------------------------------------------------
                                                                   case          1            2            3            4            5            6
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV...............................  2022$ millions..........      2,554.7      2,602.7      2,720.2      2,596.0      2,590.1      2,619.4      2,706.9
Change in INPV.....................  2022$ millions..........  ...........         47.9        165.5         41.2         35.3         64.7        152.2
                                     %.......................  ...........          1.9          6.5          1.6          1.4          2.5          6.0
Product Conversion Costs...........  2022$ millions..........  ...........          4.2         13.4         15.4         16.9         17.9         28.4
Capital Conversion Costs...........  2022$ millions..........  ...........          4.0        214.7        307.9        359.8        406.2        623.1
                                                                           -----------------------------------------------------------------------------
    Total Investment Required **...  2022$ millions..........  ...........          8.2        228.1        323.3        376.7        424.1        651.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Numbers in parentheses indicate a negative number.
** Numbers may not sum exactly due to rounding.


                 Table V.21--Manufacturer Impact Analysis for Consumer Water Heaters Under the Preservation of Operating Profit Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 No-new-                               Trial standard level *
                                               Units            standards  -----------------------------------------------------------------------------
                                                                   case          1            2            3            4            5            6
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV...............................  2022$ millions..........      2,554.7      2,532.9      2,347.4      2,168.6      2,115.9      2,044.0      1,804.2
Change in INPV.....................  2022$ millions..........  ...........       (21.8)      (207.3)      (386.1)      (438.8)      (510.7)      (750.5)
                                     %.......................  ...........        (0.9)        (8.1)       (15.1)       (17.2)       (20.0)       (29.4)
Product Conversion Costs...........  2022$ millions..........  ...........          4.2         13.4         15.4         16.9         17.9         28.4
Capital Conversion Costs...........  2022$ millions..........  ...........          4.0        214.7        307.9        359.8        406.2        623.1
                                                                           -----------------------------------------------------------------------------
    Total Investment Required**....  2022$ millions..........  ...........          8.2        228.1        323.3        376.7        424.1        651.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Numbers in parentheses indicate a negative number.
** Numbers may not sum exactly due to rounding.

    At TSL 1, DOE estimates that impacts on INPV will range from -$21.8 
million to $47.9 million, or a change in INPV of -0.9 to 1.9 percent. 
At TSL 1, industry free cash-flow is $210.1 million, which is a 
decrease of $3.2 million compared to the no-new-standards case value of 
$213.3 million in 2029, the year leading up to the proposed standards. 
Industry conversion costs total $8.2 million.
    TSL 1 would set the energy conservation standard for gas-fired 
storage water heaters at EL 1, oil-fired storage water heaters at EL 1, 
small electric storage water heaters at baseline, electric storage 
water heaters with an effective storage volume at least 20 gallons and 
less or equal to 55 gallons (excluding small electric storage water 
heaters) at baseline, electric storage water heaters with effective 
volumes above 55 gallons at EL 1, and gas-fired instantaneous water 
heaters at EL 1. At TSL 1, DOE estimates that manufacturers will incur 
approximately $4.2 million in product conversion costs, as some gas-
fired storage water heaters, electric storage water heaters, and gas-
fired instantaneous water heaters will need to be redesigned to comply 
with the standard. DOE also estimates that manufacturers will incur 
approximately $4.0 million in capital conversion costs at TSL 1 to 
accommodate the need for increased capacity for gas-fired & electric 
storage water heaters.
    At TSL 1, the shipment-weighted average MPC for all consumer water 
heaters increases by 3.3 percent relative to the no-new-standards case 
shipment-weighted average MPC for all water heaters in 2030. In the 
preservation of gross margin markup scenario, manufacturers are able to 
fully pass on this slight cost increase to consumers. The slight 
increase in shipment-weighted average MPC for consumer water heaters 
outweighs the $8.2 million in conversion costs, causing a slightly 
positive change in INPV at TSL 2 under the preservation of gross margin 
markup scenario.
    Under the preservation of operating profit markup scenario, 
manufacturers earn the same per-unit operating profit as would be 
earned in the no-new-standards case, but manufacturers do not earn 
additional profit from their investments. In this scenario, the 3.3 
percent shipment-weighted average MPC increase results in a reduction 
in the manufacturer markup after the analyzed compliance year. This 
reduction in the manufacturer markup and the $8.2 million in conversion 
costs incurred by manufacturers cause a slightly negative change in 
INPV at TSL 1 under the preservation of operating profit markup 
scenario.
    At TSL 2, DOE estimates that impacts on INPV will range from -
$207.3 million to $165.5 million, or a change in INPV of -8.1 to 6.5 
percent. At TSL 2, industry free cash-flow is $112.2 million, which is 
a decrease of $101.1 million compared to the no-new-standards case 
value of $213.3 million in 2029, the year leading up to the

[[Page 49144]]

proposed standards. Industry conversion costs total $228.1 million.
    TSL 2 would set the energy conservation standard for gas-fired 
storage water heaters at EL 2, oil-fired storage water heaters at EL 2, 
small electric storage water heaters at baseline, electric storage 
water heaters with an effective storage volume at least 20 gallons and 
less than 55 gallons (excluding small electric storage water heaters) 
at EL 1, electric storage water heaters with effective volume above 55 
gallons at EL 1, and gas-fired instantaneous water heaters at EL 2. At 
TSL 2, DOE estimates that manufacturers will incur approximately $13.4 
million in product conversion costs, as some gas-fired storage water 
heaters, electric storage water heaters, and gas-fired instantaneous 
water heaters will need to be redesigned to comply with the standard. 
While small electric storage water heaters could remain reliant on 
electric resistance technology, most electric storage water heaters 
would need to transition to heat pump technology. Heat pump ESWHs 
currently comprises approximately 5% of the electric storage water 
heater market. TSL 2 would shift an estimated 63% of electric storage 
water heaters to heat pumps by 2030, driving large investments to 
expand production capacity of heat exchangers and to optimize 
production costs. As a result, DOE estimates that manufacturers will 
incur approximately $191.9 million in capital conversion costs for 
ESWHs (and $214.7 million in capital conversion costs for all product 
classes) at TSL 2 to accommodate the need for increased capacity.
    At TSL 2, the shipment-weighted average MPC for all consumer water 
heaters increases by 27.7 percent relative to the no-new-standards case 
shipment-weighted average MPC for all water heaters in 2030. In the 
preservation of gross margin markup scenario, manufacturers are able to 
fully pass on this slight cost increase to consumers. The increase in 
shipment-weighted average MPC for consumer water heaters outweighs the 
$228.1 million in conversion costs, causing a slightly positive change 
in INPV at TSL 2 under the preservation of gross margin markup 
scenario.
    Under the preservation of operating profit markup scenario, 
manufacturers earn the same per-unit operating profit as would be 
earned in the no-new-standards case, but manufacturers do not earn 
additional profit from their investments. In this scenario, the 27.7 
percent shipment-weighted average MPC increase results in a reduction 
in the manufacturer markup after the analyzed compliance year. This 
reduction in the manufacturer markup and the $228.1 million in 
conversion costs incurred by manufacturers cause a negative change in 
INPV at TSL 2 under the preservation of operating profit markup 
scenario.
    At TSL 3, DOE estimates that impacts on INPV will range from -
$386.1 million to $41.2 million, or a change in INPV of -15.1 to 1.6 
percent. At TSL 3, industry free cash-flow is $69.5 million, which is a 
decrease of $143.8 million compared to the no-new-standards case value 
of $192.8 million in 2029, the year leading up to the proposed 
standards. Industry conversion costs total $323.3 million.
    TSL 3 would set the energy conservation standard for gas-fired 
storage water heaters at EL 2, oil-fired storage water heaters at EL 2, 
small electric storage water heaters at EL 1, electric storage water 
heaters with an effective storage volume at least 20 gallons and less 
than 55 gallons (excluding small electric storage water heaters) at EL 
1, electric storage water heaters with effective volume above 55 
gallons at EL 1, and gas-fired instantaneous water heaters at EL 2. At 
TSL 3, DOE estimates that manufacturers will incur approximately $15.4 
million in product conversion costs, as some gas-fired storage water 
heaters, electric storage water heaters with effective volume between 
20 and 55 gallons, and gas-fired instantaneous water heaters will need 
to be redesigned to comply with the standard. At TSL 3, 100% of 
electric storage water heaters would need to shift to heat pump 
technology by 2030, driving large investments in product redesign and 
expanding manufacturing capacity. This will necessitate small electric 
storage water heater manufacturers developing split-system heat pump 
designs. To reach this level, DOE estimates that industry will incur 
approximately $307.9 million in capital conversion costs at TSL 3 to 
accommodate the need for increased capacity.
    At TSL 3, the shipment-weighted average MPC for all consumer water 
heaters increases by 40.5 percent relative to the no-new-standards case 
shipment-weighted average MPC for all water heaters in 2030. In the 
preservation of gross margin markup scenario, manufacturers are able to 
fully pass on this slight cost increase to consumers. The increase in 
shipment-weighted average MPC for consumer water heaters outweighs the 
$323.3 million in conversion costs, causing a slightly positive change 
in INPV at TSL 3 under the preservation of gross margin markup 
scenario.
    Under the preservation of operating profit markup scenario, 
manufacturers earn the same per-unit operating profit as would be 
earned in the no-new-standards case, but manufacturers do not earn 
additional profit from their investments. In this scenario, the 40.5 
percent shipment-weighted average MPC increase results in a reduction 
in the manufacturer markup after the analyzed compliance year. This 
reduction in the manufacturer markup and the $323.3 million in 
conversion costs incurred by manufacturers cause a negative change in 
INPV at TSL 3 under the preservation of operating profit markup 
scenario.
    At TSL 4, DOE estimates that impacts on INPV will range from -
$438.8 million to $35.3 million, or a change in INPV of -17.2 to 1.4 
percent. At TSL 4, industry free cash-flow is $45.7 million, which is a 
decrease of $167.6 million compared to the no-new-standards case value 
of $213.3 million in 2029, the year leading up to the proposed 
standards. Industry conversion costs total $376.7 million.
    TSL 4 would set the energy conservation standard for gas-fired 
storage water heaters at EL 2, oil-fired storage water heaters at EL 2, 
small electric storage water heaters at EL 1, electric storage water 
heaters with an effective storage volume at least 20 gallons and less 
than 55 gallons (excluding small electric storage water heaters) at EL 
2, electric storage water heaters with effective volume above 55 
gallons at EL 2, and gas-fired instantaneous water heaters at EL 3. At 
TSL 4, DOE estimates that manufacturers will incur approximately $16.9 
million in product conversion costs, as some gas-fired storage water 
heaters, electric storage water heaters with effective volume between 
20 and 55 gallons, electric storage water heaters with effective volume 
above 55 gallons, and gas-fired instantaneous water heaters will need 
to be redesigned to comply with the standard. TSL 4 would shift 100% of 
electric storage water heaters to heat pumps, driving large investments 
in product capacity of heat exchangers and to optimize production 
costs. This will necessitate small electric storage water heater 
manufacturers developing split system heat pump designs. DOE estimates 
that manufacturers could incur approximately $359.8 million in capital 
conversion costs at TSL 4 to accommodate the need for increased 
capacity.
    At TSL 4, the shipment-weighted average MPC for all consumer water 
heaters increases by 43.5 percent relative to the no-new-standards case

[[Page 49145]]

shipment-weighted average MPC for all water heaters in 2030. In the 
preservation of gross margin markup scenario, manufacturers are able to 
fully pass on this slight cost increase to consumers. The increase in 
shipment-weighted average MPC for consumer water heaters outweighs the 
$376.7 million in conversion costs, causing a slightly positive change 
in INPV at TSL 4 under the preservation of gross margin markup 
scenario.
    Under the preservation of operating profit markup scenario, 
manufacturers earn the same per-unit operating profit as would be 
earned in the no-new-standards case, but manufacturers do not earn 
additional profit from their investments. In this scenario, the 43.5 
percent shipment-weighted average MPC increase results in a reduction 
in the manufacturer markup after the analyzed compliance year. This 
reduction in the manufacturer markup and the $376.7 million in 
conversion costs incurred by manufacturers cause a negative change in 
INPV at TSL 4 under the preservation of operating profit markup 
scenario.
    At TSL 5, DOE estimates that impacts on INPV will range from -
$510.7 million to $64.7 million, or a change in INPV of -20.0 to 2.5 
percent. At TSL 5, industry free cash-flow is $24.5 million, which is a 
decrease of $188.8 million compared to the no-new-standards case value 
of $213.3 million in 2029, the year leading up to the proposed 
standards. Industry conversion costs total $424.1 million.
    TSL 5 would set the energy conservation standard for gas-fired 
storage water heaters at EL 2, oil-fired storage water heaters at EL 2, 
small electric storage water heaters at EL 1, electric storage water 
heaters with an effective storage volume less than 55 gallons 
(excluding small electric storage water heaters) at EL 3, electric 
storage water heaters with effective volume above 55 gallons at EL 3, 
and gas-fired instantaneous water heaters at EL 4. At TSL 5, DOE 
estimates that manufacturers will incur approximately $17.9 million in 
product conversion costs, as some gas-fired storage water heaters, 
electric storage water heaters with effective volume of between 20 and 
55 gallons, electric storage water heaters with effective volume above 
55 gallons, and gas-fired instantaneous water heaters will need to be 
redesigned to comply with the standard. Heat pump technology currently 
comprises approximately 5% of the electric storage water heater market. 
TSL 5 would shift 100% of electric storage water heaters to heat pumps, 
driving large investments in product capacity of heat exchangers and to 
optimize production costs. This will necessitate small electric storage 
water heater manufacturers developing split system heat pumps. 
Additionally, requiring fully modulating burners for gas instantaneous 
water heaters and larger condensers for gas storage water heaters would 
require significant investments in capacity. As a result, DOE also 
estimates that manufacturers will incur approximately $406.2 million in 
capital conversion costs at TSL 5 to accommodate the need for increased 
capacity.
    At TSL 5, the shipment-weighted average MPC for all consumer water 
heaters increases by 51.7 percent relative to the no-new-standards case 
shipment-weighted average MPC for all water heaters in 2030. In the 
preservation of gross margin markup scenario, manufacturers are able to 
fully pass on this cost increase to consumers. The increase in 
shipment-weighted average MPC for consumer water heaters outweighs the 
$424.1 million in conversion costs, causing a slightly positive change 
in INPV at TSL 5 under the preservation of gross margin markup 
scenario.
    Under the preservation of operating profit markup scenario, 
manufacturers earn the same per-unit operating profit as would be 
earned in the no-new-standards case, but manufacturers do not earn 
additional profit from their investments. In this scenario, the 51.7 
percent shipment-weighted average MPC increase results in a reduction 
in the manufacturer markup after the analyzed compliance year. This 
reduction in the manufacturer markup and the $424.1 million in 
conversion costs incurred by manufacturers cause a negative change in 
INPV at TSL 5 under the preservation of operating profit markup 
scenario.
    At TSL 6, DOE estimates that impacts on INPV will range from -
$750.5 million to $152.2 million, or a change in INPV of -29.4 to 6.0 
percent. At TSL 6, industry free cash-flow is negative $76.7 million, 
which is a decrease of $290.0 million compared to the no-new-standards 
case value of $213.3 million in 2029, the year leading up to the 
proposed standards. Industry conversion costs total $651.5 million. TSL 
6 would set the energy conservation standard for gas-fired storage 
water heaters at EL 5, oil-fired storage water heaters at EL 2, small 
electric storage water heaters at EL 1, electric storage water heaters 
with an effective storage volume less than 55 gallons (excluding small 
electric storage water heaters) at EL 3, electric storage water heaters 
with effective volume above 55 gallons at EL 3, and gas-fired 
instantaneous water heaters at EL 4. At TSL 6, DOE estimates that 
manufacturers will incur approximately $28.4 million in product 
conversion costs, as some gas-fired storage water heaters, electric 
storage water heaters with effective volume between 20 and 55 gallons, 
and gas-fired instantaneous water heaters will need to be redesigned to 
comply with the standard. Heat pump technology currently comprises 
approximately 5% of the electric storage water heater market. TSL 6 
would shift 100% of electric storage water heaters to heat pumps, 
driving large investments in product capacity of heat exchangers and to 
optimize production costs. This will necessitate small electric storage 
water heater manufacturers developing split system heat pump designs. 
Additionally, requiring fully modulating burners for gas instantaneous 
water heaters and larger condensers, electronic ignition, power 
venting, and larger heat exchangers for gas storage water heaters would 
require significant investments in capacity. As a result, DOE also 
estimates that manufacturers will incur approximately $623.1 million in 
capital conversion costs at TSL 5 to accommodate the need for increased 
capacity.
    At TSL 6, the shipment-weighted average MPC for all consumer water 
heaters increases by 84.3 percent relative to the no-new-standards case 
shipment-weighted average MPC for all water heaters in 2030. In the 
preservation of gross margin markup scenario, manufacturers are able to 
fully pass on this cost increase to consumers. The increase in 
shipment-weighted average MPC for consumer water heaters outweighs the 
$651.5 million in conversion costs, causing a slightly positive change 
in INPV at TSL 6 under the preservation of gross margin markup 
scenario.
    Under the preservation of operating profit markup scenario, 
manufacturers earn the same per-unit operating profit as would be 
earned in the no-new-standards case, but manufacturers do not earn 
additional profit from their investments. In this scenario, the 84.3 
percent shipment-weighted average MPC increase results in a reduction 
in the manufacturer markup after the analyzed compliance year. This 
reduction in the manufacturer markup and the $651.5 million in 
conversion costs incurred by manufacturers cause a negative change in 
INPV at TSL 6 under the preservation of operating profit markup 
scenario.
b. Direct Impacts on Employment
    To quantitatively assess the potential impacts of amended energy

[[Page 49146]]

conservation standards on direct employment in the consumer water 
heaters industry, DOE used the GRIM to estimate the domestic labor 
expenditures and number of direct employees in the no-new-standards 
case and in each of the standards cases during the analysis period. 
Labor expenditures related to product manufacturing depend on the labor 
intensity of the product, the sales volume, and an assumption that 
wages remain fixed in real terms over time. The total labor 
expenditures in each year are calculated by multiplying the total MPCs 
by the labor percentage of MPCs. The total labor expenditures in the 
GRIM were then converted to total production employment levels by 
dividing production labor expenditures by the average fully burdened 
wage multiplied by the average number of hours worked per year per 
production worker. To do this, DOE relied on the ASM inputs; \163\ 
Production Workers Annual Wages, Production Workers Annual Hours, 
Production Workers for Pay Period, and Number of Employees. DOE also 
relied on the BLS employee compensation data \164\ to determine the 
fully burdened wage ratio. The fully burdened wage ratio factors in 
paid leave, supplemental pay, insurance, retirement and savings, and 
legally required benefits.
---------------------------------------------------------------------------

    \163\ U.S. Census Bureau, Annual Survey of Manufactures. 
``Summary Statistics for Industry Groups and Industries in the U.S. 
(2020).'' Available at: www.census.gov/data/tables/time-series/econ/asm/2018-2020-asm.html (Last accessed April 1, 2023).
    \164\ U.S. Bureau of Labor Statistics. Employer Costs for 
Employee Compensation. June 16, 2022. Available at: www.bls.gov/news.release/pdf/ecec.pdf (Last accessed April 1, 2023).
---------------------------------------------------------------------------

    The number of production employees is then multiplied by the U.S. 
labor percentage to convert total production employment to total 
domestic production employment. The U.S. labor percentage represents 
the industry fraction of domestic manufacturing production capacity for 
the covered product. This value is derived from manufacturer 
interviews, product database analysis, and publicly available 
information. DOE estimates that 70 percent of consumer water heaters 
are produced domestically.
    The domestic production employees estimate covers production line 
workers, including line supervisors, who are directly involved in 
fabricating and assembling products within the OEM facility. Workers 
performing services that are closely associated with production 
operations, such as materials handling tasks using forklifts, are also 
included as production labor. DOE's estimates only account for 
production workers who manufacture the specific products covered by 
this proposed rulemaking.
    Non-production employees account for the remainder of the direct 
employment figure. The non-production employees estimate covers 
domestic workers who are not directly involved in the production 
process, such as sales, engineering, human resources, and management. 
Using the amount of domestic production workers calculated above, non-
production domestic employees are extrapolated by multiplying the ratio 
of non-production workers in the industry compared to production 
employees. DOE assumes that this employee distribution ratio remains 
constant between the no-new-standards case and standards cases.
    Direct employment is the sum of domestic production employees and 
non-production employees. Using the GRIM, DOE estimates in the absence 
of new energy conservation standards there would be 6,589 domestic 
employees for consumer water heaters in 2030. Table V.22 shows the 
range of the impacts of energy conservation standards on U.S. 
manufacturing employment in the consumer water heaters industry. The 
following discussion provides a qualitative evaluation of the range of 
potential impacts presented in Table V.22.

                             Table V.22--Domestic Direct Employment Impacts for Consumer Water Heater Manufacturers in 2030
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                              No-new-
                                          standards case       TSL 1           TSL 2           TSL 3           TSL 4           TSL 5           TSL 6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Direct Employment in 2030...............           6,589           6,847           7,450           7,342           7,255           7,578           8,978
Potential Changes in Direct Employment    ..............        0 to 258  (1,719) to 861  (2,236) to 753  (2,236) to 666  (2,236) to 989      (2,236) to
 Workers in 2030 *......................                                                                                                           2,389
--------------------------------------------------------------------------------------------------------------------------------------------------------
* DOE presents a range of potential employment impacts. Numbers in parentheses denote negative values.

    The direct employment impacts shown in Table V.22 represent the 
potential domestic employment changes that could result following the 
compliance date for the consumer water heater product classes in this 
proposal. Employment could increase or decrease due to the labor 
content of the various products being manufactured domestically or if 
manufacturers decided to move production facilities abroad because of 
the amended standards. The upper bound estimate corresponds to an 
increase in the number of domestic workers that would result from 
amended energy conservation standards if manufacturers continue to 
produce the same scope of covered products within the United States 
after compliance takes effect. The lower bound estimate represents the 
maximum decrease in production workers if manufacturing of heat pump 
electric storage water heaters moved to lower labor-cost countries. 
Many manufacturers currently produce at least a portion of their 
electric storage consumer water heaters in countries with lower labor 
costs. DOE anticipates that adopting an amended standard will 
necessitate large investments in production capability and capacity for 
the industry to transition to heat pump technology for electric storage 
water heaters. This large investment could increase the risk that 
manufacturers reevaluate domestic production siting options. Siting 
decisions depend on a wide range of factors beyond the standard. 
Additionally, many OEMs have traditionally kept the most advanced 
manufacturing and more efficient technologies at domestic production 
facilities. However, to establish a lower bound, the direct employment 
analysis assumed a reduction in domestic employment commensurate with 
the percentage of electric storage water heaters shipments that 
transition to heat pump designs.
    Additional detail on the analysis of direct employment can be found 
in chapter 12 of the NOPR TSD. Additionally, the employment impacts

[[Page 49147]]

discussed in this section are independent of the employment impacts 
from the broader U.S. economy, which are documented in chapter 16 of 
the NOPR TSD.
c. Impacts on Manufacturing Capacity
    Industry concerns around manufacturing capacity were driven by 
potential technology transitions. In particular, manufacturers focused 
on the transition to heat pump technology for electric storage water 
heaters with rated storage volumes between 20 and 55 gallons. The vast 
majority of sales today in this product class are electric resistance 
water heaters. DOE estimates less than 8 percent of current sales are 
heat pump units. At the proposed level, all electric storage water 
heaters with rated storage volumes above 35 gallons, and all ESWHs with 
medium or high draw patterns, would incorporate heat pump technology. 
Industry would need to add capacity to produce an additional three to 
four million heat pump electric storage water heater units per year. In 
interviews, manufacturers noted that heat pump electric storage water 
heaters are more complex to manufacture than electric resistance water 
heaters. In written comments, Rheem noted the need for significant 
capital investments for new and upgraded manufacturing facilities 
(Rheem, No. 45 at p. 5). DOE estimated conversion costs based on both 
industry feedback and estimates of capital investment from the 
engineering analysis. DOE's analysis indicated significant investment 
in additional production floor space and in production capacity for 
heat exchangers. At the proposed level, conversion costs total $230 
million, presuming all OEMs of electric storage water heaters invest in 
the transition to heat pump models.
d. Impacts on Subgroups of Manufacturers
    As discussed in section IV.J.1 of this document, using average cost 
assumptions to develop an industry cash-flow estimate may not be 
adequate for assessing differential impacts among manufacturer 
subgroups. Small manufacturers, niche manufacturers, and manufacturers 
exhibiting a cost structure substantially different from the industry 
average could be affected disproportionately. DOE used the results of 
the industry characterization to group manufacturers exhibiting similar 
characteristics. Consequently, DOE identified small business 
manufacturers as a subgroup for a separate impact analysis.
    For the small business subgroup analysis, DOE applied the small 
business size standards published by the Small Business Administration 
(``SBA'') to determine whether a company is considered a small 
business. The size standards are codified at 13 CFR part 121. To be 
categorized as a small business under NAICS code 335220, ``major 
household appliance manufacturing,'' a consumer water heater 
manufacturer and its affiliates may employ a maximum of 1,500 
employees. The 1,500-employee threshold includes all employees in a 
business's parent company and any other subsidiaries. Based on this 
classification, DOE identified two potential manufacturers that could 
qualify as domestic small businesses.
    The small business subgroup analysis is discussed in more detail in 
chapter 12 of the NOPR TSD. DOE examines the potential impacts on small 
business manufacturers in section VI.B of this NOPR.
e. Cumulative Regulatory Burden
    One aspect of assessing manufacturer burden involves looking at the 
cumulative impact of multiple DOE standards and the product-specific 
regulatory actions of other Federal agencies that affect the 
manufacturers of a covered product or equipment. While any one 
regulation may not impose a significant burden on manufacturers, the 
combined effects of several existing or impending regulations may have 
serious consequences for some manufacturers, groups of manufacturers, 
or an entire industry. Assessing the impact of a single regulation may 
overlook this cumulative regulatory burden. In addition to energy 
conservation standards, other regulations can significantly affect 
manufacturers' financial operations. Multiple regulations affecting the 
same manufacturer can strain profits and lead companies to abandon 
product lines or markets with lower expected future returns than 
competing products. For these reasons, DOE conducts an analysis of 
cumulative regulatory burden as part of its rulemakings pertaining to 
appliance efficiency.
    Some consumer water heater manufacturers also make other products 
or equipment that could be subject to energy conservation standards set 
by DOE. DOE looks at other regulations that affects manufacturer of 
consumer water heater manufacturers that are Federal, are product-
specific, and that will take effect three years before or after the 
estimated 2029 compliance date. Therefore, this cumulative regulatory 
burden analysis focuses on DOE regulations taking place between 2026 
and 2032. This information is presented in Table V.23.
    DOE does not incorporate any regulations not yet finalized into its 
analysis, as cost and timing would be speculative. However, 
stakeholders listed a number of on-going appliance standards as 
cumulative regulatory burden. Where these DOE appliance standard 
rulemakings have reached the NOPR stage, DOE includes them in Table 
V.23 for tracking purposes.

Table V.23--Compliance Dates and Expected Conversion Expenses of Federal Energy Conservation Standards Affecting
                                       Consumer Water Heater Manufacturers
----------------------------------------------------------------------------------------------------------------
                                                                                                     Industry
                                                     Number of                       Industry       conversion
  Federal energy conservation       Number of      manufacturers      Approx.       conversion     costs/product
           standard              manufacturers *   affected from  standards year       costs          revenue
                                                   this rule **                     (millions)       [dagger]
----------------------------------------------------------------------------------------------------------------
Room Air Conditioners 88 FR                    8               3            2026   $24.8 (2021$)            0.4%
 34298 (May 26, 2023).........
Consumer Pool Heaters 88 FR                   20               3            2028   $48.4 (2021$)            4.7%
 34624 (May 30, 2023).........
Commercial Water Heating                      14               7            2026   $34.6 (2020$)            4.7%
 Equipment [dagger][dagger] 87
 FR 30610 (May 19, 2022)......
Consumer Furnaces                             15               2            2029  $150.6 (2020$)            1.4%
 [dagger][dagger] 87 FR 40590
 (July 7, 2022)...............
Consumer Clothes Dryers                       15               3            2027  $149.7 (2020$)            1.8%
 [dagger][dagger] 87 FR 51734
 (August 23, 2022)............
Microwave Ovens                               18               3            2026   $46.1 (2021$)            0.7%
 [dagger][dagger] 87 FR 52282
 (August 24, 2022)............
Residential Clothes Washers                   19               3            2027  $690.3 (2021$)            5.2%
 [dagger][dagger] 88 FR 13520
 (March 3, 2023)..............
Refrigerators, Freezers, and                  49               3            2027        $1,323.6            3.8%
 Refrigerator-Freezers                                                                   (2021$)
 [dagger][dagger] 88 FR 12452
 (February 27, 2023)..........

[[Page 49148]]

 
Miscellaneous Refrigeration                   38               8            2029  $126.9 (2021$)            3.1%
 Products [dagger][dagger] 88
 FR 19382 (March 31, 2023)....
Dishwashers [dagger][dagger]                  22               2            2027  $125.6 (2021$)            2.1%
 88 FR 32514 (May 19, 2023)...
----------------------------------------------------------------------------------------------------------------
* This column presents the total number of manufacturers identified in the energy conservation standard rule
  contributing to cumulative regulatory burden.
** This column presents the number of manufacturers producing consumer water heaters that are also listed as
  manufacturers in the listed energy conservation standard contributing to cumulative regulatory burden.
[dagger] This column presents industry conversion costs as a percentage of product revenue during the conversion
  period. Industry conversion costs are the upfront investments manufacturers must make to sell compliant
  products/equipment. The revenue used for this calculation is the revenue from just the covered product/
  equipment associated with each row. The conversion period is the time frame over which conversion costs are
  made and lasts from the publication year of the final rule to the compliance year of the energy conservation
  standard. The conversion period typically ranges from 3 to 5 years, depending on the rulemaking.
[dagger][dagger] Indicates a NOPR publications. Values may change on publication of a Final Rule.

    BWC provided a comment on regulations DOE should take into 
consideration for its cumulative regulatory burden. (BWC, No. 32 at p. 
4). Some of the DOE rulemakings BWC listed, such as the consumer 
boilers standard rulemaking,\165\ are not in Table V.23. because the 
rulemakings are on-going and do not yet have a proposed standard level 
or proposed compliance date. Any estimation of cost or timing at this 
time would be speculative. Additionally, DOE does not list test 
procedures in Table V.23. When applicable, test procedure costs are 
considered in the energy conservation standards analysis. The Federal 
Energy Efficiency Standards Final Rules for Commercial and Multi-family 
High rise Residential Buildings \166\ and Low-rise Residential 
Buildings Design and Construction \167\ rulemaking identified by BWC 
were not explicitly considered to be cumulative regulatory burden 
because the regulated entities are not consumer water heater 
manufacturers, but DOE did incorporate the impact of these final rules 
in shipment analysis.
---------------------------------------------------------------------------

    \165\ www.regulations.gov/docket/EERE-2012-BT-STD-0047.
    \166\ www.regulations.gov/docket/EERE-2022-BT-STD-0012.
    \167\ www.regulations.gov/docket/EERE-2022-BT-STD-0013.
---------------------------------------------------------------------------

    In addition to these Federal rulemakings, BWC noted several 
California governance bodies have ongoing rulemakings regarding Zero 
NOX Emissions Standards, including the California Air 
Resources Board,\168\ the Bay Area Air Quality Management 
District,\169\ and the South Coast Air Quality Management 
District.\170\ DOE incorporated a distribution of shipments that are 
low NOX & ultra-low NOX into its shipment 
analysis, as well as accounted for the differences in manufacturer 
product costs for low NOX & ultra-low NOX and the 
impact of low NOX & ultra-low NOX on the overall 
NOX emission savings.
---------------------------------------------------------------------------

    \168\ https://ww2.arb.ca.gov/sites/default/files/2021-10/2022_SSS_October_Workshop_Presentation.pdf.
    \169\ https://www.baaqmd.gov/rules-and-compliance/rule-development/building-appliances.
    \170\ https://www.aqmd.gov/docs/default-source/clean-air-plans/air-quality-management-plans/2022-air-quality-management-plan/2022-aqmp-residential-and-commercial-buildings-working-group/2022-aqmd-residential-and-commercial-building-wgm-2.pdf?sfvrsn=6.
---------------------------------------------------------------------------

    DOE requests information regarding the impact of cumulative 
regulatory burden on manufacturers of consumer water heaters associated 
with multiple DOE standards or product-specific regulatory actions of 
other Federal agencies.
3. National Impact Analysis
    This section presents DOE's estimates of the national energy 
savings and the NPV of consumer benefits that would result from each of 
the TSLs considered as potential amended standards.
a. Significance of Energy Savings
    To estimate the energy savings attributable to potential amended 
standards for consumer water heaters, DOE compared their energy 
consumption under the no-new-standards case to their anticipated energy 
consumption under each TSL. The savings are measured over the entire 
lifetime of products purchased in the 30-year period that begins in the 
first full year of anticipated compliance with amended standards (2030-
2059). Table V.24 presents DOE's projections of the national energy 
savings for each TSL considered for consumer water heaters. The savings 
were calculated using the approach described in section IV.H.2 of this 
document.

        Table V.24--Cumulative National Energy Savings for Consumer Water Heaters; 30 Years of Shipments
                                                   [2030-2059]
----------------------------------------------------------------------------------------------------------------
                                                                      Trial standard level
        Energy savings          Product class  -----------------------------------------------------------------
                                                    1          2          3          4          5          6
----------------------------------------------------------------------------------------------------------------
                                                                              quads
----------------------------------------------------------------------------------------------------------------
Primary energy...............  GSWH...........        0.4        1.8        1.8        1.8        1.8        7.5
                               OSWH...........      0.001      0.001      0.001      0.001      0.001      0.001
                               Small ESWH (20        0.00       0.00        1.5        1.5        1.5        1.5
                                gal <=Veff <=
                                35 gal and FHR
                                <51 gal).
                               ESWH (20 gal          0.00       24.3       28.5       33.3       34.3       34.3
                                <=Veff <=55
                                gal),
                                excluding
                                Small ESWH.
                               ESWH (55 gal         0.001      0.001      0.001      0.005       0.01       0.01
                                www.whitehouse.gov/omb/circulars_a004_a-4/ (last accessed May 1, 2023).
    \172\ Section 325(m) of EPCA requires DOE to review its 
standards at least once every 6 years, and requires, for certain 
products, a 3-year period after any new standard is promulgated 
before compliance is required, except that in no case may any new 
standards be required within 6 years of the compliance date of the 
previous standards. While adding a 6-year review to the 3-year 
compliance period adds up to 9 years, DOE notes that it may 
undertake reviews at any time within the 6-year period and that the 
3-year compliance date may yield to the 6-year backstop. A 9-year 
analysis period may not be appropriate given the variability that 
occurs in the timing of standards reviews and the fact that for some 
products, the compliance period is 5 years rather than 3 years.

         Table V.25--Cumulative National Energy Savings for Consumer Water Heaters; 9 Years of Shipments
                                                   [2030-2038]
----------------------------------------------------------------------------------------------------------------
                                                                      Trial standard level
        Energy savings          Product class  -----------------------------------------------------------------
                                                    1          2          3          4          5          6
----------------------------------------------------------------------------------------------------------------
                                                                              quads
----------------------------------------------------------------------------------------------------------------
Primary energy...............  GSWH...........        0.1        0.6        0.6        0.6        0.6        2.3
                               OSWH...........      0.000      0.001      0.001      0.001      0.001      0.001
                               Small ESWH (20        0.00       0.00        0.4        0.4        0.4        0.4
                                gal <=Veff
                                <=35 gal and
                                FHR <51 gal).
                               ESWH (20 gal          0.00        7.3        8.4        9.8       10.1       10.1
                                <=Veff <=55
                                gal),
                                excluding
                                Small ESWH.
                               ESWH (55 gal         0.000      0.000      0.000      0.001      0.004      0.004
                                www.whitehouse.gov/omb/circulars_a004_a-4/ (last accessed May 1, 2023).

 Table V.26--Cumulative Net Present Value of Consumer Benefits for Consumer Water Heaters; 30 Years of Shipments
                                                   [2030-2059]
----------------------------------------------------------------------------------------------------------------
                                                                      Trial standard level
        Discount rate           Product class  -----------------------------------------------------------------
                                                    1          2          3          4          5          6
----------------------------------------------------------------------------------------------------------------
                                                                          billion 2022$
----------------------------------------------------------------------------------------------------------------
3 percent....................  GSWH...........        1.6        7.1        7.1        7.1        7.1       10.6
                               OSWH...........       0.01       0.02       0.02       0.02       0.02       0.02
                               Small ESWH (20         0.0        0.0        4.2        4.2        4.2        4.2
                                gal <=Veff
                                <=35 gal and
                                FHR <51 gal).
                               ESWH (20 gal           0.0        152        177        213        214        214
                                <=Veff <=55
                                gal),
                                excluding
                                Small ESWH.
                               ESWH (55 gal         0.005      0.005      0.005       0.03        0.1        0.1
                                2 
that DOE estimated for each of the considered TSLs for consumer water 
heaters. Section IV.L of this document discusses the SC-CO2 
values that DOE used. Table V.29 presents the value of CO2 
emissions reduction at each TSL for each of the SC-CO2 
cases. The time-series of annual values is presented for the proposed 
TSL in chapter 14 of the NOPR TSD.

                          Table V.29--Present Value of CO2 Emissions Reduction for Consumer Water Heaters Shipped in 2030-2059
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  SC-CO2 Case
                                                     ---------------------------------------------------------------------------------------------------
                         TSL                                                             Discount rate and statistics
                                                     ---------------------------------------------------------------------------------------------------
                                                             5% Average               3% Average              2.5% Average          3% 95th percentile
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Billion 2022$
                                                     ---------------------------------------------------------------------------------------------------
1...................................................                      0.3                      1.5                      2.4                      4.7
2...................................................                      4.3                       19                       30                       58
3...................................................                      5.1                       22                       35                       68
4...................................................                      6.0                       27                       42                       81
5...................................................                      6.3                       28                       44                       84
6...................................................                      9.5                       42                       66                      127
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As discussed in section IV.L.2, DOE estimated the climate benefits 
likely to result from the reduced emissions of methane and 
N2O that DOE estimated for each of the considered TSLs for 
consumer water heaters. Table V.30 presents the value of the 
CH4 emissions reduction at each TSL, and Table V.31 presents 
the value of the N2O emissions reduction at each TSL. The 
time-series of annual values is presented for the proposed TSL in 
chapter 14 of the NOPR TSD.

                        Table V.30--Present Value of Methane Emissions Reduction for Consumer Water Heaters Shipped in 2030-2059
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  SC-CH4 Case
                                                     ---------------------------------------------------------------------------------------------------
                         TSL                                                             Discount rate and statistics
                                                     ---------------------------------------------------------------------------------------------------
                                                             5% Average               3% Average              2.5% Average          3% 95th percentile
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Billion 2022$
                                                     ---------------------------------------------------------------------------------------------------
1...................................................                      0.2                      0.6                      0.9                      1.7
2...................................................                      1.8                      5.7                      8.0                       15
3...................................................                      2.1                      6.4                      9.1                       17
4...................................................                      2.5                      7.8                       11                       21

[[Page 49153]]

 
5...................................................                      2.6                      8.2                       12                       22
6...................................................                      4.5                       14                       20                       37
--------------------------------------------------------------------------------------------------------------------------------------------------------


                     Table V.31--Present Value of Nitrous Oxide Emissions Reduction for Consumer Water Heaters Shipped in 2030-2059
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  SC-N2O Case
                                                     ---------------------------------------------------------------------------------------------------
                         TSL                                                             Discount rate and statistics
                                                     ---------------------------------------------------------------------------------------------------
                                                             5% Average               3% Average              2.5% Average          3% 95th percentile
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Billion 2022$
                                                     ---------------------------------------------------------------------------------------------------
1...................................................                   0.0003                    0.001                    0.002                    0.003
2...................................................                     0.02                     0.06                     0.10                     0.17
3...................................................                     0.02                     0.08                     0.12                     0.20
4...................................................                     0.02                     0.09                     0.14                     0.23
5...................................................                     0.02                     0.09                     0.14                     0.24
6...................................................                     0.02                     0.10                     0.16                     0.26
--------------------------------------------------------------------------------------------------------------------------------------------------------

    DOE is well aware that scientific and economic knowledge about the 
contribution of CO2 and other GHG emissions to changes in 
the future global climate and the potential resulting damages to the 
global and U.S. economy continues to evolve rapidly. DOE, together with 
other Federal agencies, will continue to review methodologies for 
estimating the monetary value of reductions in CO2 and other 
GHG emissions. This ongoing review will consider the comments on this 
subject that are part of the public record for this and other 
rulemakings, as well as other methodological assumptions and issues. 
DOE notes that the proposed standards would be economically justified 
even without inclusion of monetized benefits of reduced GHG emissions.
    DOE also estimated the monetary value of the health benefits 
associated with NOX and SO2 emissions reductions 
anticipated to result from the considered TSLs for consumer water 
heaters. The dollar-per-ton values that DOE used are discussed in 
section IV.L of this document. Table V.32 presents the present value 
for NOX emissions reduction for each TSL calculated using 7-
percent and 3-percent discount rates, and Table V.33 presents similar 
results for SO2 emissions reductions. The results in these 
tables reflect application of EPA's low dollar-per-ton values, which 
DOE used to be conservative. The time-series of annual values is 
presented for the proposed TSL in chapter 14 of the NOPR TSD.

 Table V.32--Present Value of NOX Emissions Reduction for Consumer Water
                      Heaters Shipped in 2030-2059
------------------------------------------------------------------------
                                            3% Discount     7% Discount
                   TSL                         rate            rate
------------------------------------------------------------------------
                                                   Billion 2022$
                                         -------------------------------
1.......................................             1.2             3.5
2.......................................              14              40
3.......................................              16              47
4.......................................              19              56
5.......................................              20              58
6.......................................              31              90
------------------------------------------------------------------------


 Table V.33--Present Value of SO2 Emissions Reduction for Consumer Water
                      Heaters Shipped in 2030-2059
------------------------------------------------------------------------
                                            3% Discount     7% Discount
                   TSL                         rate            rate
------------------------------------------------------------------------
                                                   Billion 2022$
                                         -------------------------------
1.......................................           0.002            0.01
2.......................................             3.0             8.4
3.......................................             3.6              10
4.......................................             4.1              12
5.......................................             4.2              12
6.......................................             4.2              12
------------------------------------------------------------------------

    DOE has not considered the monetary benefits of the reduction of Hg 
for this proposed rule. Not all the public health and environmental 
benefits from the reduction of greenhouse gases, NOX, and 
SO2 are captured in the values above, and additional 
unquantified benefits from the reductions of those pollutants as well 
as from the reduction of Hg, direct PM, and other co-pollutants may be 
significant.
7. Other Factors
    The Secretary of Energy, in determining whether a standard is 
economically justified, may consider any other factors that the 
Secretary deems to be relevant. (42 U.S.C. 6295(o)(2)(B)(i)(VII)) No 
other factors were considered in this analysis.

[[Page 49154]]

8. Summary of Economic Impacts
    Table V.34 presents the NPV values that result from adding the 
estimates of the potential economic benefits resulting from reduced GHG 
and NOX and SO2 emissions to the NPV of consumer 
benefits calculated for each TSL considered in this rulemaking. The 
consumer benefits are domestic U.S. monetary savings that occur as a 
result of purchasing the covered consumer water heaters, and are 
measured for the lifetime of products shipped in 2030-2059. The climate 
benefits associated with reduced GHG emissions resulting from the 
adopted standards are global benefits, and are also calculated based on 
the lifetime of consumer water heaters shipped in 2030-2059.

                              Table V.34--Consumer NPV Combined With Present Value of Climate Benefits and Health Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
                        Category                               TSL 1           TSL 2           TSL 3           TSL 4           TSL 5           TSL 6
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                       Using 3% discount rate for Consumer NPV and Health Benefits (billion 2022$)
--------------------------------------------------------------------------------------------------------------------------------------------------------
5% Average SC-GHG case..................................             7.0             216             255             304             310             350
3% Average SC-GHG case..................................             8.6             235             277             330             337             392
2.5% Average SC-GHG case................................              10             248             292             349             356             422
3% 95th percentile SC-GHG case..........................              13             283             333             398             407             500
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                       Using 7% discount rate for Consumer NPV and Health Benefits (billion 2022$)
--------------------------------------------------------------------------------------------------------------------------------------------------------
5% Average SC-GHG case..................................             2.6              79              92             110             112             124
3% Average SC-GHG case..................................             4.2              98             113             136             139             166
2.5% Average SC-GHG case................................             5.3             111             129             155             158             196
3% 95th percentile SC-GHG case..........................             8.4             146             170             204             209             275
--------------------------------------------------------------------------------------------------------------------------------------------------------

B. Conclusion

    When considering new or amended energy conservation standards, the 
standards that DOE adopts for any type (or class) of covered product 
must be designed to achieve the maximum improvement in energy 
efficiency that the Secretary determines is technologically feasible 
and economically justified. (42 U.S.C. 6295(o)(2)(A)). In determining 
whether a standard is economically justified, the Secretary must 
determine whether the benefits of the standard exceed its burdens by, 
to the greatest extent practicable, considering the seven statutory 
factors discussed previously. (42 U.S.C. 6295(o)(2)(B)(i)) The new or 
amended standard must also result in significant conservation of 
energy. (42 U.S.C. 6295(o)(3)(B))
    For this NOPR, DOE considered the impacts of amended standards for 
consumer water heaters at each TSL, beginning with the maximum 
technologically feasible level, to determine whether that level was 
economically justified. Where the max-tech level was not justified, DOE 
then considered the next most efficient level and undertook the same 
evaluation until it reached the highest efficiency level that is both 
technologically feasible and economically justified and saves a 
significant amount of energy.
    To aid the reader as DOE discusses the benefits and/or burdens of 
each TSL, tables in this section present a summary of the results of 
DOE's quantitative analysis for each TSL. In addition to the 
quantitative results presented in the tables, DOE also considers other 
burdens and benefits that affect economic justification. These include 
the impacts on identifiable subgroups of consumers who may be 
disproportionately affected by a national standard and impacts on 
employment.
    DOE also notes that the economics literature provides a wide-
ranging discussion of how consumers trade off upfront costs and energy 
savings in the absence of government intervention. Much of this 
literature attempts to explain why consumers appear to undervalue 
energy efficiency improvements. There is evidence that consumers 
undervalue future energy savings as a result of (1) a lack of 
information, (2) a lack of sufficient salience of the long-term or 
aggregate benefits, (3) a lack of sufficient savings to warrant 
delaying or altering purchases, (4) excessive focus on the short term, 
in the form of inconsistent weighting of future energy cost savings 
relative to available returns on other investments, (5) computational 
or other difficulties associated with the evaluation of relevant 
tradeoffs, and (6) a divergence in incentives (for example, between 
renters and owners, or builders and purchasers). Having less than 
perfect foresight and a high degree of uncertainty about the future, 
consumers may trade off these types of investments at a higher than 
expected rate between current consumption and uncertain future energy 
cost savings.
    In DOE's current regulatory analysis, potential changes in the 
benefits and costs of a regulation due to changes in consumer purchase 
decisions are included in two ways. First, if consumers forego the 
purchase of a product in the standards case, this decreases sales for 
product manufacturers, and the impact on manufacturers attributed to 
lost revenue is included in the MIA. Second, DOE accounts for energy 
savings attributable only to products actually used by consumers in the 
standards case; if a standard decreases the number of products 
purchased by consumers, this decreases the potential energy savings 
from an energy conservation standard. DOE provides estimates of 
shipments and changes in the volume of product purchases in chapter 9 
of the NOPR TSD. However, DOE's current analysis does not explicitly 
control for heterogeneity in consumer preferences, preferences across 
subcategories of products or specific features, or consumer price 
sensitivity variation according to household income.\174\
---------------------------------------------------------------------------

    \174\ P.C. Reiss and M.W. White. Household Electricity Demand, 
Revisited. Review of Economic Studies. 2005. 72(3): pp. 853-883. 
doi: 10.1111/0034-6527.00354.
---------------------------------------------------------------------------

    While DOE is not prepared at present to provide a fuller 
quantifiable framework for estimating the benefits and costs of changes 
in consumer purchase decisions due to an energy conservation standard, 
DOE is committed to developing a framework that can support empirical 
quantitative tools for improved assessment of the consumer welfare 
impacts of appliance standards. DOE has posted a paper that discusses 
the issue of consumer welfare impacts of appliance energy conservation 
standards, and potential enhancements to the methodology by which these 
impacts are defined and

[[Page 49155]]

estimated in the regulatory process.\175\ DOE welcomes comments on how 
to more fully assess the potential impact of energy conservation 
standards on consumer choice and how to quantify this impact in its 
regulatory analysis in future rulemakings.
---------------------------------------------------------------------------

    \175\ Sanstad, A.H. Notes on the Economics of Household Energy 
Consumption and Technology Choice. 2010. Lawrence Berkeley National 
Laboratory. www1.eere.energy.gov/buildings/appliance_standards/pdfs/consumer_ee_theory.pdf (last accessed May 1, 2023).
---------------------------------------------------------------------------

1. Benefits and Burdens of TSLs Considered for Consumer Water Heater 
Standards
    Table V.35and Table V.36 summarize the quantitative impacts 
estimated for each TSL for consumer water heaters. The national impacts 
are measured over the lifetime of consumer water heaters purchased in 
the 30-year period that begins in the anticipated year of compliance 
with amended standards (2030-2059). The energy savings, emissions 
reductions, and value of emissions reductions refer to full-fuel-cycle 
results. The efficiency levels contained in each TSL are described in 
section V.A of this document.

                               Table V.35--Summary of Analytical Results for Consumer Water Heater TSLs: National Impacts
--------------------------------------------------------------------------------------------------------------------------------------------------------
                        Category                               TSL 1           TSL 2           TSL 3           TSL 4           TSL 5           TSL 6
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                         Cumulative FFC National Energy Savings
--------------------------------------------------------------------------------------------------------------------------------------------------------
Quads...................................................             0.8            27.3            33.3            38.4            39.7            46.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Cumulative FFC Emissions Reduction
--------------------------------------------------------------------------------------------------------------------------------------------------------
CO2 (million metric tons)...............................              41             501             586             702             732           1,098
CH4 (thousand tons).....................................             518           4,541           5,193           6,345           6,660          11,290
N2O (thousand tons).....................................             0.1             4.6             5.6             6.4             6.6             7.2
NOX (thousand tons).....................................             112             988           1,130           1,380           1,448           2,450
SO2 (thousand tons).....................................             0.2             143             177             201             206             204
Hg (tons)...............................................             0.0             1.0             1.2             1.4             1.4             1.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                     Present Value of Monetized Benefits and Costs (3% discount rate, billion 2022$)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Consumer Operating Cost Savings.........................             5.1             198             241             280             290             326
    Climate Benefits *..................................             2.2              25              29              35              36              56
    Health Benefits **..................................             3.5              49              57              68              71             102
    Total Benefits [dagger].............................              11             271             327             383             397             484
Consumer Incremental Product Costs [Dagger].............             2.1              36              50              52              60              93
Consumer Net Benefits...................................             3.0             161             191             228             230             234
        Total Net Benefits..............................             8.6             235             277             330             337             392
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                     Present Value of Monetized Benefits and Costs (7% discount rate, billion 2022$)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Consumer Operating Cost Savings.........................             1.9              75              90             105             109             123
    Climate Benefits *..................................             2.2              25              29              35              36              56
    Health Benefits **..................................             1.2              17              20              24              25              35
    Total Benefits [dagger].............................             5.3             117             139             163             169             214
Consumer Incremental Product Costs [Dagger].............             1.1              19              26              27              31              48
Consumer Net Benefits...................................             0.8              56              65              78              78              75
        Total Net Benefits..............................             4.2              98             113             136             139             166
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: This table presents the costs and benefits associated with consumer water heaters shipped in 2030-2059. These results include benefits to
  consumers which accrue after 2059 from the products shipped in 2030-2059.
* To monetize the benefits of reducing greenhouse gas emissions this analysis uses the interim estimates presented in the Technical Support Document:
  Social Cost of Carbon, Methane, and Nitrous Oxide Interim Estimates Under Executive Order 13990 published in February 2021 by the Interagency Working
  Group on the Social Cost of Greenhouse Gases (IWG). Climate benefits are calculated using four different estimates of the SC-CO2, SC-CH4 and SC-N2O.
  Together, these represent the global SC-GHG. For presentational purposes of this table, the climate benefits associated with the average SC-GHG at a 3
  percent discount rate are shown, but the Department does not have a single central SC-GHG point estimate.
** Health benefits are calculated using benefit-per-ton values for NOX and SO2. DOE is currently only monetizing (for NOX and SO2) PM2.5 precursor
  health benefits and (for NOX) ozone precursor health benefits, but will continue to assess the ability to monetize other effects such as health
  benefits from reductions in direct PM2.5 emissions. The health benefits are presented at real discount rates of 3 and 7 percent. See section IV.L of
  this document for more details.
[dagger] Total and net benefits include consumer, climate, and health benefits. For presentation purposes, total and net benefits for both the 3-percent
  and 7-percent cases are presented using the average SC-GHG with 3-percent discount rate, but the Department does not have a single central SC-GHG
  point estimate. DOE emphasizes the importance and value of considering the benefits calculated using all four sets of SC-GHG estimates.
[Dagger] Costs include incremental equipment costs as well as installation costs.


[[Page 49156]]


                       Table V.36--Summary of Analytical Results for Consumer Water Heater TSLs: Manufacturer and Consumer Impacts
--------------------------------------------------------------------------------------------------------------------------------------------------------
                        Category                               TSL 1           TSL 2           TSL 3           TSL 4           TSL 5           TSL 6
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Manufacturer Impacts
--------------------------------------------------------------------------------------------------------------------------------------------------------
Industry NPV (million 2022$) (No-new-standards case INPV      2,532.9 to      2,347.4 to      2,168.6 to      2,115.9 to      2,044.0 to      1,804.2 to
 = 2,554.7).............................................         2,602.7         2,720.2         2,596.0         2,590.1         2,619.4         2,706.9
Industry NPV (% change).................................    (0.9) to 1.9    (8.1) to 6.5   (15.1) to 1.6   (17.2) to 1.4   (20.0) to 2.5   (29.4) to 6.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          Consumer Average LCC Savings (2022$)
--------------------------------------------------------------------------------------------------------------------------------------------------------
GSWH....................................................              17              52              52              52              52           (247)
OSWH....................................................             145             165             165             165             165             165
Small ESWH (20 gal <= Veff <=35 gal and FHR <51 gal)....              NA              NA             418             418             418             418
ESWH (20 gal <=Veff <=55 gal excluding Small ESWH)......              NA           1,868           1,868           2,283           2,101           2,101
ESWH (55 gal =20 gal and <=55 gal excluding Small ESWH).......              NA             3.0             3.0             2.7             3.0             3.0
ESWH (>=55 gal and <=120 gal)...........................             0.2             0.2             0.2             0.4             1.5             1.5
GIWH....................................................             7.3             5.9             5.9             5.9             6.3             6.3
Shipment-Weighted Average *.............................             3.7             5.4             6.2             6.2             6.4            11.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Percent of Consumers that Experience a Net Cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
GSWH....................................................              22              36              36              36              36              70
OSWH....................................................               9              25              25              25              25              25
Small ESWH..............................................               0               0              56              56              56              56
ESWH (>=20 gal and <=55 gal excluding Small ESWH).......               0              25              25              23              30              30
ESWH (>=55 gal and <=120 gal)...........................               0               0               0               1              42              42
GIWH....................................................              13              13              13              29              36              36
Shipment-Weighted Average\*\............................              11              27              30              31              35              49
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Weighted by market share in start year of 2030.

    DOE first considered TSL 6, which represents the max-tech 
efficiency levels for all product classes. At TSL 6, the design options 
for GSWHs and GIWHs include condensing technology; the design options 
for ESWHs include heat pump technology; and the design options for 
OSWHs include extra insulation and multi-flue heat exchangers. TSL 6 
would require extensive changes to the way manufacturers currently 
produce water heaters. The percent of shipments expected to meet or 
exceed the efficiency levels in TSL 6 by the compliance date of the 
proposed standard is 0.2 percent of shipments for GSWHs, 17 percent of 
shipments for OSWHs, 1 percent of small ESWH, 5 percent of shipments 
for electric storage water heaters with an effective storage volume 
less than 55 gallons (excluding small electric storage water heaters), 
11 percent of ESWHs with an effective storage volume greater than or 
equal to 55 gallons, and 8 percent of shipments for GIWHs. There would 
be a significant ramp up in manufacturing capacity, especially for gas 
storage and electric storage water heaters, needed to support the 
market due and transition to accommodate these advance technologies.
    TSL 6 would save an estimated 46.0 quads of energy, an amount DOE 
considers significant. Under TSL 6, the NPV of consumer benefit would 
be $75 billion using a discount rate of 7 percent, and $234 billion 
using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 6 are 1,098 Mt of 
CO2, 11,290 thousand tons of CH4, 7.2 thousand 
tons of N2O, 2,450 thousand tons of NOX, 204 
thousand tons of SO2, and 1.4 tons of Hg. The estimated 
monetary value of the climate benefits from reduced GHG emissions 
(associated with the average SC-GHG at a 3-percent discount rate) at 
TSL 6 is $56 billion. The estimated monetary value of the health 
benefits from reduced SO2 and NOX emissions at 
TSL 6 is $35 billion using a 7-percent discount rate and $102 billion 
using a 3-percent discount rate.
    Using a 7-percent discount rate for consumer benefits and costs, 
health benefits from reduced SO2 and NOX 
emissions, and the 3-percent discount rate case for climate benefits 
from reduced GHG emissions, the estimated total NPV at TSL 6 is $166 
billion. Using a 3-percent discount rate for all benefits and costs, 
the estimated total NPV at TSL 6 is $392 billion. The estimated total 
NPV is provided for additional information, however, DOE primarily 
relies upon the NPV of consumer benefits when determining whether a

[[Page 49157]]

proposed standard level is economically justified.
    At TSL 6, consumers will experience an average LCC increase of $247 
for GSWHs, which is primarily driven by the total installed cost 
increases for gas condensing technology. For OSWHs, consumers will 
experience an average LCC savings of $165 and for GIWHs, consumers will 
experience an average LCC savings of $95. For electric storage water 
heaters, consumers will experience an LCC savings. For GSWHs, the 
consumers experiencing a net LCC cost is 70 percent and for small 
ESWHs, the consumers experiencing a net LCC cost is 56 percent. While 
there are LCC savings for ESWHs, DOE notes that the incremental 
installed costs are more than double those of baseline efficiency 
products, which can be a burden on consumers replacing their water 
heater when it fails, particularly lower income homeowners, if they 
need to find a way to cover the payment up front to purchase and 
install the replacement.
    At TSL 6, the projected change in INPV ranges from a decrease of 
$750.5 million to an increase of $152.2 million, which corresponds to a 
decrease of 29.4 percent and an increase of 6.0 percent, respectively. 
The range of the impacts is driven primarily by the ability of 
manufacturers to recover their compliance costs. DOE estimates that 
industry must invest $651.5 million to comply with standards set at TSL 
6. DOE believes that manufacturers would need to significantly upgrade 
their facilities to accommodate gas-condensing technologies for GIWHs 
as well as heat pump technology for ESWHs. Upgrades to produce heat 
pump electric storage water heaters include expansion of heat exchanger 
facilities and inclusion of refrigeration charging systems. In 
addition, manufacturers would need to expand their component sourcing 
of compressors and more sophisticated controls to produce these more 
advanced technology products. DOE estimates that manufacturers would 
need to scale up production of heat pump electric storage water heaters 
from approximately 5% of ESWH sales today (0.23 million units in 2023) 
to 100% of ESWH units in 2030. DOE believes significant research and 
development efforts would also be needed to support the introduction of 
a wider variety of heat pump water heater models in the market to meet 
the various needs of consumers, especially split system heat pump water 
heaters that would be needed to support the replacement of small 
electric storage water heaters. Currently, there are very limited split 
system heat pump water heater models commercially available in the 
United States, which are produced by only a few manufacturers and are 
sold in low quantities. DOE is concerned that sufficient products may 
not be available to support the small electric storage water heaters 
market, and new products may not be introduced by a large majority of 
water heater manufacturers by the compliance date of this proposed 
rule. In sum, DOE is concerned that industry will not be able to 
transition to 100% of electric storage water heaters to heat pump 
designs within a 5-year compliance window, as would be necessary to 
comply with TSL 6.
    DOE requests comment on the ability of manufacturers to transition 
to producing heat pump water heaters within the compliance window.
    DOE is also concerned about training the workforce that would be 
needed to install and service the heat pump water heater market by the 
compliance date of the standards. ESWHs are typically installed by 
plumbers. Advance technology water heaters require the ability to work 
with refrigerants similar to heating, ventilation, and air conditioning 
servicing contractors. DOE hopes that the emergence of workforce 
programs supported by the Inflation Reduction Act and the Bipartisan 
Infrastructure Law will begin to support the training and education of 
the workforce needed to support the clean energy transition. However, 
DOE understands this transition will take time and the workforce may 
not be ready at the scale necessary to support TSL 6.
    DOE requests comment on the pace at which workforce development is 
expected to install and service the heat pump water heater market by 
the compliance date of the standards.
    The Secretary tentatively concludes that at TSL 6 for consumer 
water heaters, the benefits of energy savings, positive NPV of consumer 
benefits, emission reductions, and the estimated monetary value of the 
emissions reductions would be outweighed by economics impacts to 
manufacturers, primarily driven by the ramp up in scale and offerings 
needed to support both ESWHs and GWSHs efficiencies at TSL 6, the 
economic costs for small ESHW consumers (many of whom are low income), 
and the distinct impact of high initial costs for low-income consumers 
purchasing replacement water heaters in emergency circumstances. As 
mentioned above, less than 0.1 percent of gas-storage water heater 
shipments and approximately 5 percent of all electric storage water 
heaters shipments currently meet TSL 6 efficiencies. DOE also notes 
that new technologies have recently been introduced into the heat pump 
water heater market such as 120-volt water heaters, whose efficiencies 
are lower than TSL 6. Such 120-volt water heaters can be more readily 
adopted by more households, lowering installation costs. While DOE 
expects continued innovation in the heat pump water heat market at this 
time, DOE is worried that prematurely requiring TSL 6 efficiency levels 
will remove these new products from the market prematurely. The 
Secretary is also concerned about the uncertainty in the market to 
ensure GSWHs and ESWHs will continue to be available to all consumers, 
including small ESWH replacements. Consequently, the Secretary has 
tentatively concluded that TSL 6 is not economically justified.
    DOE then considered TSL 5, which represents the max-tech efficiency 
levels for all product classes except for GSWHs, which includes a lower 
non-condensing efficiency level. At TSL 5, the design options for GSWHs 
include either gas-actuated or electric flue dampers instead of 
condensing technologies. For the remainder of the product classes, the 
efficiency levels and technologies are the same as in TSL 6: that is, 
for ESWHs, TSL 5 includes max-technology efficiency levels for heat 
pump water heaters across all ESWH product classes, including small 
ESWHs. The percent of shipments expected to meet or exceed the 
efficiency levels in TSL 5 is the same as TSL 6 except approximately 5 
percent of shipments for GSWHs are expected to meet by the compliance 
date of the proposed standards. At TSL 5, the standard would transition 
all consumer electric storage water heaters to heat pump technology 
across all effective storage volumes, delivery capacity offerings, and 
sizes in the market.
    TSL 5 would save an estimated 39.7 quads of energy, an amount DOE 
considers significant. Under TSL 5, the NPV of consumer benefit would 
be $78 billion using a discount rate of 7 percent, and $230 billion 
using a discount rate of 3 percent.
    At TSL 5, DOE estimates that consumers will see a life cycle cost 
savings for all product classes. At TSL 5, the average LCC savings is 
$52 for GSWH consumers, which is driven by the lower installed costs as 
compared to the TSL 6 condensing level. While the LCC savings are 
positive for a majority of consumers across TSL 5 product classes, 56 
percent of small ESWH consumers will experience a net cost when 
installing a split system heat pump water heater.

[[Page 49158]]

    At TSL 5, the projected change in INPV ranges from a decrease of 
$510.7 million to an increase of $64.7 million, which correspond to a 
decrease of 20.0 percent and an increase of 2.5 percent, respectively. 
DOE estimates that industry must invest $424.1 million to comply with 
standards set at TSL 5. The primary driver of high conversion costs is 
the industry's investment to meet market demand for heat pump electric 
storage water heaters. As noted above, DOE estimates that manufacturers 
would need to scale up production of heat pump electric storage water 
heaters from approximately 5% of all ESWH units (0.23 million units in 
2023) to 100% of units in 2030. As a part of this scale-up, 
manufacturers would need to develop new split-system heat pumps for the 
small electric storage water heater market. Manufacturers would likely 
need to invest in cost optimization of existing designs, in new 
designs, and in additional manufacturing capacity for heat pump water 
heaters. For GIWHs, manufacturers would need to update product designs 
and production tooling to accommodate increased heat exchanger sizes. 
Additionally, given the greater complexity and assembly time of 
condensing GIWHs, manufacturers would likely need to add manufacturing 
lines to maintain production capacity.
    Similar to the discussion at TSL 6, DOE's concerns continue to be 
driven by the ramp up in manufacturing, research, and development that 
would be needed to support the heat pump water heater market to 
continue today's volumes. TSL 5 would require the expansion of heat 
pump lines and the introduction of new products to support the entire 
market, especially small ESWHs.
    The Secretary tentatively concludes that at TSL 5 for consumer 
water heaters, the benefits of energy savings, positive NPV of consumer 
benefits, emission reductions, and the estimated monetary value of the 
emissions reductions would be outweighed by the impacts on 
manufacturers, driven by the uncertainty in the ramp up needed to 
support a full transition of all volumes to heat pump water heaters for 
ESWHs, the impacts on consumers of small ESWHs, and the increase in 
initial costs. While the LCC savings are positive for a majority of 
consumers across TSL 5 product classes, 56 percent of small ESWH 
consumers would experience net costs when installing a split system 
heat pump water heater. DOE is concerned about the increase in first 
costs for consumers forced to purchase a replacement water heater when 
their existing water heater fails and the inability for the market to 
introduce cost-optimized heat pump water heaters as an offering to 
consumers to help mitigate the initial first cost increase. As at TSL 
5, DOE is also concerned about the workforce being ready to service and 
install at the volumes necessary to support such a transition in 5 
years. Consequently, the Secretary has tentatively concluded that TSL 5 
is not economically justified.
    DOE then considered TSL 4, which represents a lower efficiency 
level for ESWHs and GIWHs and maintains the same efficiency levels for 
OSWHs and GSWHs as at TSL 5. At TSL 4, the design options for GSWHs 
include either gas-actuated or electric flue dampers; the design 
options for OSWHs include extra insulation and multi-flue heat 
exchangers; the design options for ESWHs include heat pump technology; 
and the design options for GIWHs include condensing technology. The 
percent of shipments in 2030 expected to meet the proposed level in for 
ESWHs with an effective storage volume less than 55 gallons is 13 
percent, which is a significant increase from the max-tech efficiency 
levels. But for small ESWHs, the percent of shipments expected to meet 
TSL 4 remains at 1. At TSL 4, the standard would transition all 
consumer electric storage water heaters to heat pump technology, but at 
a more moderate efficiency level for non-small ESWHs. DOE still expects 
this transition to be significant, but DOE notes that manufacturers 
have more experience producing non-small ESWHs at these efficiency 
levels due to the prevalence of the ENERGY STAR program. DOE also 
expects the programs from the Inflation Reduction Act, including the 
appliance rebates and tax credits, to help support the expansion of 
this market.
    TSL 4 would save an estimated 38.4 quads of energy, an amount DOE 
considers significant. Under TSL 4, the NPV of consumer benefit would 
be $78 billion using a discount rate of 7 percent, and $228 billion 
using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 4 are 702 Mt of 
CO2, 6,345 thousand tons of CH4, 6.4 thousand 
tons of N2O, 1,380 thousand tons of NOX, 458 
thousand tons of SO2, and 1.4 tons of Hg. The estimated 
monetary value of the climate benefits from reduced GHG emissions 
(associated with the average SC-GHG at a 3-percent discount rate) at 
TSL 4 is $35 billion. The estimated monetary value of the health 
benefits from reduced SO2 and NOX emissions at 
TSL 4 is $24 billion using a 7-percent discount rate and $68 billion 
using a 3-percent discount rate.
    Using a 7-percent discount rate for consumer benefits and costs, 
health benefits from reduced SO2 and NOX 
emissions, and the 3-percent discount rate case for climate benefits 
from reduced GHG emissions, the estimated total NPV at TSL 4 is $136 
billion. Using a 3-percent discount rate for all benefits and costs, 
the estimated total NPV at TSL 4 is $330 billion. The estimated total 
NPV is provided for additional information, however DOE primarily 
relies upon the NPV of consumer benefits when determining whether a 
proposed standard level is economically justified.
    The average LCC across all product classes is positive. However, 
DOE continues to be concerned about the development of new models that 
would need to be introduced into the split-system heat pump water 
heater market to support the small ESWH replacements. As DOE noted in 
discussing TSL 6, only a few manufacturers produce products today in 
very small volumes and would not be able to support the entire small 
ESWH market today. Similar to TSLs 5 and 6, 56 percent of small ESWH 
consumers will experience a net cost when installing a split system 
heat pump water heater
    At TSL 4, the projected change in INPV ranges from a decrease of 
$438.8 million to an increase of $35.3 million, which correspond to a 
decrease of 17.2 percent and an increase of 1.4 percent, respectively. 
DOE estimates that industry must invest $376.7 million to comply with 
standards set at TSL 4. For ESWH manufacturers, stepping down from max-
tech provides greater flexibility in the design process and reduces the 
level of model-specific optimization. This results in lower conversion 
costs. However, manufacturers would still need to develop new split-
system heat pumps for the small ESWH market and scale up production 
capacity for integrated heat pump water heaters. As noted above, DOE 
estimates that manufacturers would need to scale up production of heat 
pump electric storage water heaters from approximately 5% of ESWH sales 
in 2023 to 100% of units in 2030. For GIWH manufacturers, all models 
would have to incorporate condensing technology. TSL 4 is a step down 
from max-tech but still represents an efficiency level that has not yet 
been broadly adopted in by the GIWH market. While 66% of GIWHs are 
already sold at condensing levels, only 15% of shipments meet TSL 4. 
Given the greater complexity and assembly time of condensing GIWHs, as 
well as the increased heat exchanger sizes

[[Page 49159]]

necessary to meet this level, manufacturers would likely need to add 
manufacturing lines to maintain current production capacity.
    The Secretary tentatively concludes that at TSL 4 for consumer 
water heaters, the benefits of energy savings, positive NPV of consumer 
benefits, emission reductions, and the estimated monetary value of the 
emissions reductions would be outweighed by the manufacturing concerns 
and by the uncertainty associated with the industry's ability to ramp 
up production at the levels necessary to meet a standard at TSL 4 
within a 5-year period. Given TSL 4 represents a lower efficiency level 
that would require less model specific optimization, DOE expects the 
research and development efforts to be smaller and DOE does expect 
significant ramp of this greater efficiency market segment in response 
to the incentive programs. However, DOE continues to be concerned about 
industry's ability to produce more than 3 million units a year, while 
introducing new innovative products to meet consumers' needs and 
optimizing to produce lower costs products. As at TSLs 6 and 5, DOE is 
concerned that the efficiency level required by TSL 4 may preclude the 
introduction of 120-volt water heaters into the broader market, which 
DOE considered as a qualitative factor that DOE has considered in its 
decision-making. Adopting a standard level at TSL 4 would prevent 
innovation around these technologies (such as reducing their costs). 
Consequently, the Secretary has tentatively concluded that TSL 4 is not 
economically justified.
    DOE then considered TSL 3, which represents the same levels as TSL 
4 except includes a lower efficiency level for ESWHs and GIWHs. For 
those ESWHs less than 55 gallons of effective storage volume (including 
small ESWHs), TSL 3 includes an ``entry'' level heat pump efficiency 
level to accommodate some of the new product innovations that have been 
recently introduced into the market. At TSL 3, currently available 120-
V heat pump water heaters would be able to comply with the required 
efficiencies. For ESWHs greater than 55 gallons of effective storage 
volume, TSL 3 includes an incremental increase in heat pump efficiency 
over the current standards. At TSL 3, the standard would still 
transition all consumer electric storage water heaters to heat pump 
technology. As noted earlier, heat pump technology currently comprises 
approximately 5% of the electric storage water heater market. TSL 3 
would shift 100% of electric storage water heaters to heat pumps, 
driving large investments in design of new heat pump offerings and new 
product capacity. For GIWHs, TSL 3 still requires condensing technology 
but can be achieved with simpler or smaller heat exchangers than at TSL 
4.
    TSL 3 would save an estimated 33.3 quads of energy, an amount DOE 
considers significant. Under TSL 3, the NPV of consumer benefit would 
be $65 billion using a discount rate of 7 percent, and $191 billion 
using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 3 are 586 Mt of 
CO2, 5,193 thousand tons of CH4, 5.6 thousand 
tons of N2O, 1,130 thousand tons of NOX, 177 
thousand tons of SO2, and 1.2 tons of Hg. The estimated 
monetary value of the climate benefits from reduced GHG emissions 
(associated with the average SC-GHG at a 3-percent discount rate) at 
TSL 3 is $29 billion. The estimated monetary value of the health 
benefits from reduced SO2 and NOX emissions at 
TSL 3 is $20 billion using a 7-percent discount rate and $57 billion 
using a 3-percent discount rate.
    Using a 7-percent discount rate for consumer benefits and costs, 
health benefits from reduced SO2 and NOX 
emissions, and the 3-percent discount rate case for climate benefits 
from reduced GHG emissions, the estimated total NPV at TSL 3 is $113 
billion. Using a 3-percent discount rate for all benefits and costs, 
the estimated total NPV at TSL 3 is $277 billion. The estimated total 
NPV is provided for additional information, however DOE primarily 
relies upon the NPV of consumer benefits when determining whether a 
proposed standard level is economically justified.
    At TSL 3, the average LCC impact is a savings across all product 
classes. Similar to TSLs 4, 5, and 6, 56 percent of small ESWH 
consumers will experience a net cost when installing a split system 
heat pump water heater.
    At TSL 3, the projected change in INPV ranges from a decrease of 
$386.1 million to an increase of $41.2 million, which correspond to a 
decrease of 15.1 percent and an increase of 1.6 percent, respectively. 
DOE estimates that industry must invest $32 3.3 million to comply with 
standards set at TSL 3. Manufacturers would need to develop new split-
system heat pumps for the small ESWH market. They would also need to 
scale up production capacity for integrated heat pump water heaters. 
For GIWH manufactures, all product lines would have to incorporate 
condensing technology. However, the industry has extensive experience 
producing GIWH models that meet TSL 3, as 59% of GIWH sales meet or 
exceed this level today.
    The Secretary tentatively concludes that at TSL 3 for consumer 
water heaters, the benefits of energy savings, positive NPV of consumer 
benefits, emission reductions, and the estimated monetary value of the 
emissions reductions would be outweighed by the uncertainty associated 
with the ability for industry to meet the demand necessary to support 
the entire market for ESWHs, including the workforce transition needed 
to service and install all of these HPWHs. For small ESWHs, DOE 
estimates that the fraction of consumers experiencing a net cost is 56 
percent. Based on those costs to small ESWH consumers and the possible 
difficulty of meeting the market needs within the compliance timeframe, 
the Secretary has tentatively concluded that TSL 3 is not economically 
justified.
    DOE then considered TSL 2, which represents the baseline efficiency 
level for small ESWHs and heat pump efficiency levels for all other 
ESWHs. TSL 2 also includes a condensing level for GIWHs, max-tech 
efficiency levels for OSWHs, and a moderate increase in efficiency for 
GSWHs. TSL 2 also aligns most closely with the Joint Stakeholder 
Recommendation efficiency levels with minor differences to the small 
ESWH product class as discussed in section IV.C. While DOE recognizes 
that TSL 2 is not the TSL that maximizes net monetized benefits, DOE 
has weighed other non-quantified and non-monetized factors in 
accordance with EPCA in reaching this determination.
    TSL 2 would save an estimated 27.3 quads of energy, an amount DOE 
considers significant. Under TSL 2, the NPV of consumer benefit would 
be $56 billion using a discount rate of 7 percent, and $161 billion 
using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 2 are 501 Mt of 
CO2, 4,541 thousand tons of CH4, 4.6 thousand 
tons of N2O, 988 thousand tons of NOX, 143 
thousand tons of SO2, and 1.0 tons of Hg. The estimated 
monetary value of the climate benefits from reduced GHG emissions 
(associated with the average SC-GHG at a 3-percent discount rate) at 
TSL 3 is $25 billion. The estimated monetary value of the health 
benefits from reduced SO2 and NOX emissions at 
TSL 2 is $17 billion using a 7-percent discount rate and $49 billion 
using a 3-percent discount rate.
    Using a 7-percent discount rate for consumer benefits and costs, 
health benefits from reduced SO2 and NOX 
emissions, and the 3-percent discount rate case for climate benefits 
from reduced GHG emissions, the estimated total NPV at TSL 2 is $98 
billion. Using a 3-percent discount rate for all benefits

[[Page 49160]]

and costs, the estimated total NPV at TSL 2 is $235 billion. The 
estimated total NPV is provided for additional information, however DOE 
primarily relies upon the NPV of consumer benefits when determining 
whether a proposed standard level is economically justified.
    At TSL 2, the average LCC impact is a savings for all product 
classes. the average LCC impact is a savings of $52 for GSWHs, savings 
of $165 for OSWHs, savings of $1,868 for ESWHs (20 gal <= 
Veff <=55 gal) excluding small ESWHs, savings of $501 for 
ESWHs (55 gal < Veff <=120 gal), and savings of $135 for 
GIWHs. The fraction of consumers experiencing a net LCC cost is 36 
percent for GSWHs, 25 percent for OSWHs, 25 percent for ESWHs (20 gal 
<= Veff <=55 gal) excluding Small ESWHs, 0 percent for ESWHs 
(55 gal < Veff <=120 gal), and 13 percent for GIWHs. 
Consumers of small ESWH (20 gal <= Veff <=35 gal) are not 
impacted at TSL 2 as the standard is not proposed to be amended.
    At TSL 2, the projected change in INPV ranges from a decrease of 
$207.3 million to an increase of $165.5 million, which correspond to a 
decrease of 8.1 percent and an increase of 6.5 percent, respectively. 
DOE estimates that industry must invest $228.1 million to comply with 
standards set at TSL 2.
    At higher TSLs, the primary driver of high conversion costs is the 
industry's investment to meet market demand for heat pump electric 
storage water heaters. TSL 2 preserves the existing market for small 
ESWHs, allowing small ESWHs utilizing only electric resistance 
technology (i.e., that do not utilize a heat pump) to remain in the 
market. In turn, this reduces the level of investment needed to meet 
market demand for heat pump water heaters. DOE estimates industry would 
need to scale up production of heat pump electric storage water heaters 
from approximately 5% of ESWHs today to 63% of ESWHs in 2030, a 
significant reduction from higher TSLs. This approach, while still 
requiring a significant ramp up in manufacturing capacity for heat pump 
water heaters, allows for a more incremental transition to heat pump 
technology. It limits the investment required of manufacturers relative 
to higher TSLs that would require transitioning the entire ESWH market 
to heat pump technology and recognizes the benefits of providing 
additional time for small electric storage water heater designs using 
heat pump technology to mature. DOE believes that having major 
manufacturers sign on to the Joint Recommendation is a testament to 
industry's ability to ramp up capacity to produce the volumes necessary 
to support the heat pump water heater market that will be required by 
TSL 2 by the compliance date of the proposed standards.
    After considering the analysis and weighing the benefits and 
burdens, the Secretary has tentatively concluded that standards set at 
TSL 2 for consumer water heaters would be economically justified. At 
this TSL, the average LCC savings for consumers of all product classes 
are expected to be positive. The average LCC savings across all ESWH 
excluding small ESWHs consumers is $1,867. At TSL 2, the efficiency 
levels for ESWHs allow for continued development and innovation with 
120 V heat pump ESWHs as well as split system heat pump ESWHs. The 
efficiency levels at TSL 2 also allow for existing small ESWHs to 
remain on the market, providing an important option for a subset of 
consumers. The FFC national energy savings are significant and the NPV 
of consumer benefits is positive using both a 3-percent and 7-percent 
discount rate. These national benefits vastly outweigh the costs. The 
positive LCC savings--a different way of quantifying consumer 
benefits--reinforces this conclusion. The standard levels at TSL 2 are 
economically justified even without weighing the estimated monetary 
value of emissions reductions. When those emissions reductions are 
included--representing $25 billion in climate benefits (associated with 
the average SC-GHG at a 3-percent discount rate), and $17 billion 
(using a 7-percent discount rate) or $49 billion (using a 3-percent 
discount rate) in health benefits--the rationale becomes stronger 
still.
    In addition, DOE considered that the efficiency levels across TSL 2 
are generally representative of the Joint Stakeholder agreement. More 
specifically, DOE believes the Joint Stakeholder agreement from a 
cross-section group of stakeholders provides the Department a good 
indication of stakeholder views on this rulemaking and provides the 
Department with some assurance that industry can transition to these 
levels and the market will see significant benefits as indicated by 
DOE's analysis.
    Accordingly, the Secretary has tentatively concluded that TSL 2 
would offer the maximum improvement in efficiency that is 
technologically feasible and economically justified, and would result 
in the significant conservation of energy. Although results are 
presented here in terms of TSLs, DOE analyzes and evaluates all 
possible ELs for each product class in its analysis. TSL 2 is comprised 
of efficiency levels that offer significant LCC savings while keeping 
the percent of consumers experiencing a net cost at a modest level. 
Lower income homeowners, in particular, who currently use small ESWHs 
are significantly less likely to be disproportionately impacted at TSL 
2. TSL 2 also reduces the percentage of the market that would be 
transitioning to heat pump water heaters within a 5-year period. While 
DOE still understands the ramp up to accommodate heat pump water 
heaters and condensing GIWHs is significant, DOE believes manufacturers 
can leverage their existing operations, knowledge, workforce networks, 
and R&D to scale at a level needed to support a proposed standard at 
TSL 2. Lastly, TSL 2 most closely represents the recommended standard 
levels submitted by Joint Stakeholders to DOE, providing further 
support for standard levels set at TSL 2, a factor the Secretary 
considers significant.
    As discussed in section IV.F.9, DOE does not expect any significant 
amount of switching across product classes as a result of the proposed 
standards. There are a number of significant additional costs involved 
in switching from electric equipment to gas equipment and vice versa, 
such as replacing an electrical panel or installing new gas lines (both 
inside and outside of the home) and new venting. These additional costs 
can possibly exceed $1,000 on top of the installed costs estimated in 
this proposed rule, making product switching as a result of standards 
very likely to be a minimal effect at most.
    Therefore, based on the above considerations, DOE proposes the 
conservation standards for consumer water heaters at TSL 2 for those 
product classes where there are existing applicable UEF standards. For 
the remaining product classes, DOE proposes to convert the existing 
standards to the UEF metric based on the amended appendix E test 
procedure. Altogether, the proposed energy conservation standards for 
consumer water heaters, which are expressed as UEF, are shown in Table 
V.37.

[[Page 49161]]



                  Table V.37--Proposed Energy Conservation Standards for Consumer Water Heaters
----------------------------------------------------------------------------------------------------------------
                                      Effective storage
                                       volume and input
           Product class                 rating * (if             Draw pattern           Uniform energy factor
                                         applicable)
----------------------------------------------------------------------------------------------------------------
Gas-fired Storage Water Heater....  <20 gal..............  Very Small...............     0.2062-(0.0020 x Veff)
                                                           Low......................     0.4893-(0.0027 x Veff)
                                                           Medium...................     0.5758-(0.0023 x Veff)
                                                           High.....................     0.6586-(0.0020 x Veff)
                                    >=20 gal and <=55 gal  Very Small...............     0.3925-(0.0020 x Veff)
                                                           Low......................     0.6451-(0.0019 x Veff)
                                                           Medium...................     0.7046-(0.0017 x Veff)
                                                           High.....................     0.7424-(0.0013 x Veff)
                                    >55 gal and <=100 gal  Very Small...............     0.6470-(0.0006 x Veff)
                                                           Low......................     0.7689-(0.0005 x Veff)
                                                           Medium...................     0.7897-(0.0004 x Veff)
                                                           High.....................     0.8072-(0.0003 x Veff)
                                    >100 gal.............  Very Small...............     0.1482-(0.0007 x Veff)
                                                           Low......................     0.4342-(0.0017 x Veff)
                                                           Medium...................     0.5596-(0.0020 x Veff)
                                                           High.....................     0.6658-(0.0019 x Veff)
Oil-fired Storage Water Heater....  <=50 gal.............  Very Small...............     0.2909-(0.0012 x Veff)
                                                           Low......................     0.5730-(0.0016 x Veff)
                                                           Medium...................     0.6478-(0.0016 x Veff)
                                                           High.....................     0.7215-(0.0014 x Veff)
                                    >50 gal..............  Very Small...............     0.1580-(0.0009 x Veff)
                                                           Low......................     0.4390-(0.0020 x Veff)
                                                           Medium...................     0.5389-(0.0021 x Veff)
                                                           High.....................     0.6172-(0.0018 x Veff)
Very Small Electric Storage Water   <20 gal..............  Very Small...............     0.5925-(0.0059 x Veff)
 Heater.                                                   Low......................     0.8642-(0.0030 x Veff)
                                                           Medium...................     0.9096-(0.0020 x Veff)
                                                           High.....................     0.9430-(0.0012 x Veff)
Small Electric Storage Water        >=20 gal and <=35 gal  Very Small...............     0.8808-(0.0008 x Veff)
 Heater.                                                   Low......................     0.9254-(0.0003 x Veff)
Electric Storage Water Heaters....  20 and      Very Small...............                       2.30
                                     <=55 gal (excluding   Low......................                       2.30
                                     small electric        Medium...................                       2.30
                                     storage water
                                     heaters).
                                                           High.....................                       2.30
                                    >55 gal and <=120 gal  Very Small...............                       2.50
                                                           Low......................                       2.50
                                                           Medium...................                       2.50
                                                           High.....................                       2.50
                                    >120 gal.............  Very Small...............     0.3574-(0.0012 x Veff)
                                                           Low......................     0.7897-(0.0019 x Veff)
                                                           Medium...................     0.8884-(0.0017 x Veff)
                                                           High.....................     0.9575-(0.0013 x Veff)
Tabletop Water Heater.............  <20 gal..............  Very Small...............     0.5925-(0.0059 x Veff)
                                                           Low......................     0.8642-(0.0030 x Veff)
                                    >=20 gal and <=120     Very Small...............     0.6323-(0.0058 x Veff)
                                     gal.
                                                           Low......................     0.9188-(0.0031 x Veff)
Instantaneous Gas-fired Water       <2 gal and <=50,000    Very Small...............                       0.64
 Heater.                             Btu/h.                Low......................                       0.64
                                                           Medium...................                       0.64
                                                           High.....................                       0.64
                                    <2 gal and >50,000     Very Small...............                       0.89
                                     Btu/h.                Low......................                       0.91
                                                           Medium...................                       0.91
                                                           High.....................                       0.93
                                    >=2 gal and <=200,000  Very Small...............     0.2534-(0.0018 x Veff)
                                     Btu/h.                Low......................     0.5226-(0.0022 x Veff)
                                                           Medium...................     0.5919-(0.0020 x Veff)
                                                           High.....................     0.6540-(0.0017 x Veff)
Instantaneous Oil-fired Water       <2 gal and <=210,000   Very Small...............                       0.61
 Heater.                             Btu/h.                Low......................                       0.61
                                                           Medium...................                       0.61
                                                           High.....................                       0.61
                                    >=2 gal and <=210,000  Very Small...............     0.2780-(0.0022 x Veff)
                                     Btu/h.                Low......................     0.5151-(0.0023 x Veff)
                                                           Medium...................     0.5687-(0.0021 x Veff)
                                                           High.....................     0.6147-(0.0017 x Veff)
Instantaneous Electric Water        <2 gal...............  Very Small...............                       0.91
 Heater.                                                   Low......................                       0.91
                                                           Medium...................                       0.91
                                                           High.....................                       0.92

[[Page 49162]]

 
                                    >=2 gal..............  Very Small...............     0.8086-(0.0050 x Veff)
                                                           Low......................     0.9123-(0.0020 x Veff)
                                                           Medium...................     0.9252-(0.0015 x Veff)
                                                           High.....................     0.9350-(0.0011 x Veff)
Grid-Enabled Water Heater.........  >75 gal..............  Very Small...............     1.0136-(0.0028 x Veff)
                                                           Low......................     0.9984-(0.0014 x Veff)
                                                           Medium...................     0.9853-(0.0010 x Veff)
                                                           High.....................     0.9720-(0.0007 x Veff)
Gas-fired Circulating Water Heater  <=200,000 Btu/h......  Very Small...............     0.8000-(0.0011 x Veff)
                                                           Low......................     0.8100-(0.0011 x Veff)
                                                           Medium...................     0.8100-(0.0011 x Veff)
                                                           High.....................     0.8100-(0.0011 x Veff)
Oil-fired Circulating Water Heater  <=210,000 Btu/h......  Very Small...............     0.6100-(0.0011 x Veff)
                                                           Low......................     0.6100-(0.0011 x Veff)
                                                           Medium...................     0.6100-(0.0011 x Veff)
                                                           High.....................     0.6100-(0.0011 x Veff)
Electric Circulating Water Heater.  <=12 kW; for heat      Very Small...............     0.9100-(0.0011 x Veff)
                                     pump type units <=24  Low......................     0.9100-(0.0011 x Veff)
                                     A at <=250 V.         Medium...................     0.9100-(0.0011 x Veff)
                                                           High.....................     0.9200-(0.0011 x Veff)
----------------------------------------------------------------------------------------------------------------
* Effective storage volume is the representative value of storage volume as determined in accordance with the
  DOE test procedure at Appendix E to Subpart B of 10 CFR 430 and applicable sampling plans in 429.17.

    As discussed in section IV.C.1.a.iii of this NOPR, DOE analyzed an 
additional efficiency level for gas-fired instantaneous water heaters 
as part of this proposed rule that was not analyzed in the preliminary 
analysis. This efficiency level, presented as EL 3 in this NOPR, 
generally corresponds to the ENERGY STAR specification version 5.0, 
which was released on July 18, 2022 and is effective since April 18, 
2023. Though the proposed TSL 2 includes EL 2 for gas-fired 
instantaneous water heaters, DOE is also strongly considering an 
amended standard at EL 3 for instantaneous water heaters, which would 
increase the efficiency to an intermediate condensing level across all 
draw patterns. The Department's NOPR analysis shows that EL 3 for gas-
fired instantaneous water heaters translates to an average LCC savings 
of $89 for consumers, with 29% of consumer experiencing a net cost. The 
cumulative NPV for consumers at this efficiency level is $2.6 billion 
using a 3-percent discount rate, and $0.8 billion using a 7-percent 
discount rate. EL 3 for gas-fired instantaneous water heaters also 
represents an energy savings of 0.7 quads, compared to the no-new-
standards case. These additional benefits and savings from adopting an 
amended standard at EL 3 instead of EL 2 could be considered 
significant. DOE believes that manufacturers have experience with 
designing and producing GIWHs at EL 3, especially as the ENERGY STAR 
levels gain market share. DOE also understands that there will need to 
be significant increases in manufacturing capacity in order to meet 
current market demand for GIWHs. Therefore, DOE is specifically 
considering EL 3 for GIWHs in the final rule, but DOE understands this 
level was not chosen by the Joint Stakeholders as part of the 
recommended agreement submitted to DOE.
    DOE requests additional information on the benefits and burdens of 
a potential amended standard for gas-fired instantaneous water heaters 
at EL 3, especially with respect to manufacturers being able to scale 
their entire production to EL 3 in the compliance time frame being 
considered by this rulemaking.
2. Annualized Benefits and Costs of the Proposed Standards
    The annualized net benefit is (1) the annualized national economic 
value (expressed in 2022$) of the benefits from operating products that 
meet the proposed standards (consisting primarily of operating cost 
savings from using less energy, minus increases in product purchase 
costs), and (2) the annualized monetary value of the climate and health 
benefits from emission reductions.
    Table V.38 shows the annualized values for consumer water heaters 
under TSL 2, expressed in 2022$. The results under the primary estimate 
are as follows.
    Using a 7-percent discount rate for consumer benefits and costs and 
health benefits from reduced NOX and SO2 
emissions, and the 3-percent discount rate case for climate benefits 
from reduced GHG emissions, the estimated cost of the standards 
proposed in this rule is $2,235 million per year in increased equipment 
costs, while the estimated annual benefits are $7,876 million in 
reduced equipment operating costs, $1,429 million in monetized climate 
benefits, and $1,805 million in monetized health benefits. In this 
case, the net monetized benefit would amount to $8,875 million per 
year.
    Using a 3-percent discount rate for all benefits and costs, the 
estimated cost of the proposed standards is $2,420 million per year in 
increased equipment costs, while the estimated annual benefits are 
$11,357 million in reduced operating costs, $1,429 million in monetized 
climate benefits, and $2,798 million in monetized health benefits. In 
this case, the net monetized benefit would amount to $13,164 million 
per year.

[[Page 49163]]



Table V.38--Annualized Monetized Benefits and Costs of Proposed Energy Conservation Standards for Consumer Water
                                                     Heaters
                                                     [TSL 2]
----------------------------------------------------------------------------------------------------------------
                                                                                Billion 2022$/year
                                                                 -----------------------------------------------
                                                                                     Low-net-        High-net-
                                                                      Primary        benefits        benefits
                                                                     estimate        estimate        estimate
----------------------------------------------------------------------------------------------------------------
                                                3% discount rate
----------------------------------------------------------------------------------------------------------------
Consumer Operating Cost Savings.................................          11.357          10.633          12.096
Climate Benefits *..............................................           1.429           1.412           1.446
Health Benefits **..............................................           2.798           2.764           2.832
Total Monetized Benefits [dagger]...............................          15.584          14.809          16.374
Consumer Incremental Product Costs [Dagger].....................           2.420           2.488           2.356
Net Monetized Benefits..........................................          13.164          12.321          14.018
Change in Producer Cashflow (INPV [dagger][dagger]).............   (0.021)-0.017   (0.021)-0.017   (0.021)-0.017
----------------------------------------------------------------------------------------------------------------
                                                7% discount rate
----------------------------------------------------------------------------------------------------------------
Consumer Operating Cost Savings.................................           7.876           7.380           8.382
Climate Benefits * (3% discount rate)...........................           1.429           1.412           1.446
Health Benefits **..............................................           1.805           1.784           1.825
Total Monetized Benefits [dagger]...............................          11.110          10.576          11.653
Consumer Incremental Product Costs [Dagger].....................           2.235           2.290           2.183
Net Monetized Benefits..........................................           8.875           8.286           9.470
Change in Producer Cashflow (INPV [dagger][dagger]).............   (0.021)-0.017   (0.021)-0.017   (0.021)-0.017
----------------------------------------------------------------------------------------------------------------
Note: This table presents the costs and benefits associated with consumer water heaters shipped in 2030-2059.
  These results include benefits to consumers which accrue after 2059 from the products shipped in 2030-2059.
  The Primary, Low Net Benefits, and High Net Benefits Estimates utilize projections of energy prices from the
  AEO2023 Reference case, Low Economic Growth case, and High Economic Growth case, respectively. In addition,
  incremental equipment costs reflect a medium decline rate in the Primary Estimate, a low decline rate in the
  Low Net Benefits Estimate, and a high decline rate in the High Net Benefits Estimate. The methods used to
  derive projected price trends are explained in sections IV.F.1 and IV.F.4 of this document. Note that the
  Benefits and Costs may not sum to the Net Benefits due to rounding.
* To monetize the benefits of reducing greenhouse gas emissions this analysis uses the interim estimates
  presented in the Technical Support Document: Social Cost of Carbon, Methane, and Nitrous Oxide Interim
  Estimates Under Executive Order 13990 published in February 2021 by the Interagency Working Group on the
  Social Cost of Greenhouse Gases (IWG). Climate benefits are calculated using four different estimates of the
  global SC-GHG (see section IV.L of this document). For presentational purposes of this table, the climate
  benefits associated with the average SC-GHG at a 3-percent discount rate are shown, but the Department does
  not have a single central SC-GHG point estimate, and it emphasizes the importance and value of considering the
  benefits calculated using all four sets of SC-GHG estimates.
** Health benefits are calculated using benefit-per-ton values for NOX and SO2. DOE is currently only monetizing
  (for SO2 and NOX) PM2.5 precursor health benefits and (for NOX) ozone precursor health benefits, but will
  continue to assess the ability to monetize other effects such as health benefits from reductions in direct
  PM2.5 emissions. See section IV.L of this document for more details.
[dagger] Total benefits for both the 3-percent and 7-percent cases are presented using the average SC-GHG with 3-
  percent discount rate, but the Department does not have a single central SC-GHG point estimate.
[Dagger] Costs include incremental equipment costs as well as installation costs.
[dagger][dagger] Operating Cost Savings are calculated based on the life cycle costs analysis and national
  impact analysis as discussed in detail below. See sections IV.F and IV.H. DOE's NIA includes all impacts (both
  costs and benefits) along the distribution chain beginning with the increased costs to the manufacturer to
  manufacture the product and ending with the increase in price experienced by the consumer. DOE also separately
  conducts a detailed analysis on the impacts on manufacturers (the MIA). See section IV.J. In the detailed MIA,
  DOE models manufacturers' pricing decisions based on assumptions regarding investments, conversion costs,
  cashflow, and margins. The MIA produces a range of impacts, which is the rule's expected impact on the
  industry net present value (INPV). The change in industry NPV is the present value of all changes in industry
  cash flow, including changes in production costs, capital expenditures, and manufacturer profit margins.
  Change in INPV is calculated using the industry weighted average cost of capital value of 9.6% that is
  estimated in the manufacturer impact analysis (see chapter 12 of the NOPR TSD for a complete description of
  the industry weighted average cost of capital). For consumer water heaters, those values are -$21 million and
  $17 million. DOE accounts for that range of likely impacts in analyzing whether a TSL is economically
  justified. See section V.A. DOE is presenting the range of impacts to the industry net present value under two
  markup scenarios: the Preservation of Gross Margin scenario, which is the manufacturer markup scenario used in
  the calculation of Consumer Operating Cost Savings in this table, and the Preservation of Operating Profit
  Markup scenario, where DOE assumed manufacturers would not be able to increase per-unit operating profit in
  proportion to increases in manufacturer production costs. DOE includes the range of estimated INPV in the
  above table, drawing on the MIA explained further in Section IV.J, to provide additional context for assessing
  the estimated impacts of this proposal to society, including potential changes in production and consumption,
  which is consistent with OMB's Circular A-4 and E.O. 12866. If DOE were to include the industry net present
  value into the net benefit calculation for this proposed rule, the net benefits would range from $13.143
  billion to $13.181 billion at 3-percent discount rate and range from $8.854 billion to $8.892 billion at 7-
  discount rate. DOE seeks comment on this approach.

C. Test Procedure Applicability

    Manufacturers, including importers, must use product-specific 
certification templates to certify compliance to DOE. For consumer 
water heaters, the certification template reflects the general 
certification requirements specified at 10 CFR 429.12 and the product-
specific requirements specified at 10 CFR 429.17. DOE is not proposing 
to amend the product-specific certification requirements for these 
products in this standards rulemaking.
    As a result of the proposed standards in this NOPR, DOE is 
proposing further specificity around certain aspects of the appendix E 
test procedure to account for the impacts of potential new and amended 
standards on the distribution of products which would be available on 
the market as an outcome of a standards final rule. These updates are 
discussed in the following sections.
1. Efficiency Determinations Using High Temperature Testing
    As discussed section III.B of this NOPR, the test procedure for 
consumer water heaters at appendix E (as amended by the June 2023 TP 
Final

[[Page 49164]]

Rule) includes provisions for high temperature testing of certain 
electric resistance storage water heaters (i.e., setting the tank 
temperature to the highest temperature which allows the product to 
still deliver water at a nominal 125 [deg]F with the use of a mixing 
valve). Until the compliance date of amended standards, manufacturers 
must use the normal temperature testing method for representations and 
compliance with the current energy conservation standards, with the 
high temperature test method being for optional additional 
representations only.
    In the June 2023 TP Final Rule, DOE described how the high 
temperature test method would put products with the ability to increase 
effective storage volume through elevated storage temperatures on the 
same footing as products which have larger storage volumes--i.e., to 
create an equivalent basis of comparison for products which can offer 
the same effective storage capacity. As discussed in that final rule, 
when standards were promulgated in the December 2016 Conversion Factor 
Final Rule requiring heat pump efficiencies for electric storage water 
heaters above 55 gallons of rated storage volume, DOE observed a market 
shift towards smaller electric storage water heater sizes where there 
the standards did not require heat pump technology. A new market began 
to emerge for consumers who still desired effective storage volumes 
above 55 gallons but did not want to install heat pump water heaters: 
electric resistance storage water heaters less than 55 gallons in rated 
storage volume with significantly higher effective storage volumes due 
to higher storage tank temperatures. 88 FR 40406, 40446.
    DOE noted that it has recently become aware of products that are 
being marketed to consumers with ``capacity boosting'' capabilities 
which can avoid the need to install a larger storage-type water heater 
if used continuously in a high-temperature setting. The products are 
equipped with user-operable modes which set the water heater to boost 
the storage tank temperature and use a built-in mixing valve (or one 
installed at the point of manufacture) to automatically maintain the 
delivery temperature. For example, DOE noted in the June 2023 TP Final 
Rule that one manufacturer produces 30-, 40-, and 50-gallon water 
heaters with an ``X-High Setting'' claiming to provide the same amount 
of hot water (``Effective Capacity,'' as the manufacturer refers to it) 
as significantly larger water heaters with a more typical storage tank 
temperature of 125 [deg]F--such as an 80-gallon capacity for the 50-
gallon model, 64-gallon capacity for the 40-gallon model, and 48-gallon 
capacity for the 30-gallon model. Another manufacturer produces a 55-
gallon water heater with a variety of settings allowing the user to get 
``performance equivalency'' of a 65-, 80-, or 100-gallon tank, stating 
that the tank raises the temperature safely up to 170 [deg]F. Id. In 
addition, DOE notes that most water heaters on the market today, 
including products without a specific ``capacity boosting'' mode, have 
a user-operable thermostat that can be adjusted to temperatures 
exceeding 125 [deg]F. DOE believes consumers rarely modify their water 
heater temperature settings today. However, if additional hot water 
capacity were desired, a consumer could increase the thermostat setting 
on their water heater and use a mixing valve to temper the water to the 
desired outlet temperature while storing it at a much hotter 
temperature, similar to how the water heaters with a ``capacity 
boosting'' mode and mixing valve would operate.
    As stated in the July 2022 TP SNOPR and the June 2023 TP Final 
Rule, consumers would be expected to use the high temperature mode on 
such water heaters as part of the regular operation of their water 
heater because consumers are electing to purchase the water heater 
based on its capacity boosting ability. Accordingly, for such products, 
DOE expected that a representative average use cycle would include some 
portion of time in high temperature mode. 87 FR 42270, 42279; 88 FR 
40406, 40447. In particular, for electric resistance water heaters that 
can be permanently set at a high temperature to boost capacity, 
including water heaters with and without a specific capacity boosting 
mode (but not including water heaters that are set at a high 
temperature as part of a demand-response program), DOE believes that a 
representative average use cycle in the test procedure must encompass 
the ``capacity boosting'' capability as this is the mode that the 
consumer will likely be using once the water heater is installed in the 
field, as discussed later in this section.
    In cases where a water heater has the ability to be permanently set 
to store water at a higher temperature than the delivered water 
temperature setpoint, households could purchase an undersized water 
heater and operate it continuously in a high-temperature mode or 
setting to provide sufficient hot water to the residence while using a 
smaller tank than would otherwise be required. DOE notes that the 40-
gallon model and the 50-gallon models with a capacity boosting mode 
that were previously discussed are advertised by the manufacturer as 
being capable of providing effective capacities greater than 55 
gallons, which is the volume threshold above which products must comply 
to heat pump-level energy conservation standards (see 10 CFR 
430.32(d)).
    However, until the June 2023 TP Final Rule, there did not exist a 
method which could capture the effect of storage capacity boosting in 
this manner. By implementing the high temperature test method for the 
subset of products that are expected to be operated this way in the 
field, DOE can now ensure that representations for such products are 
accurate and provide consumers with the means to directly compare these 
products to the larger water heaters they will likely compete with. 
Therefore, in this NOPR, DOE is proposing that certain electric 
storage-type water heaters would be required to use the high 
temperature test method for representations and compliance. The high 
temperature test method would apply only to certain electric storage 
water heaters, and DOE's reasoning for proposing only a subset to 
comply with this is outlined in the paragraphs that follow.
    In this NOPR, DOE proposes not to amend the current standards for 
small electric storage water heaters. For these products, the standard 
is achievable with electric resistance heating elements and use of heat 
pump technology is not necessary. As shown in the market assessment 
(appendix 3A of the TSD), the most common rated storage volume for all 
other electric storage water heaters in the current market corresponds 
to a nominal volume of 40 gallons. Small electric storage water heaters 
are smaller than this current preferred capacity, thus, if some 
consumers that currently rely on 40-gallon water heaters choose to 
transition to smaller water heaters, DOE expects that there is a high 
likelihood that small electric storage water heaters would be installed 
at a higher temperature setpoint with a mixing valve (whether built-in 
or installed in the field) to achieve the same capacity as a 40-gallon 
water heater.
    Further, in response to the March 2022 Preliminary Analysis, the CA 
IOUs stated that thermostatic mixing valves are relatively inexpensive, 
widely available, and required by the plumbing code in at least one 
state. The CA IOUs indicated that a water heater with a mixing valve 
can use a 3:1 ratio of 150 [deg]F hot water to 60 [deg]F cold water to 
achieve a 125 [deg]F normal delivery temperature. The commenter stated 
that mixing valves can increase the water heater's effective FHR, such 
that an

[[Page 49165]]

electric resistance model with a lower rated volume and a mixing valve 
installed can deliver the same amount of hot water as a model with a 
higher rated volume and no mixing valve. Thus, the CA IOUs expressed 
concern that electric resistance storage water heaters with mixing 
valves could claim a significant share of the market if DOE were to 
adopt a standard level allowing electric resistance technology for 
products larger than 30 gallons or in the medium or high draw patterns. 
(CA IOUs, No. 52 at p. 8) DOE notes that small electric storage water 
heaters would include some products above 30 gallons in the very small 
or low draw patterns.
    Based on this information, DOE understands that if the proposed 
standards are ultimately adopted for electric storage water heaters, 
some consumers may choose to install smaller products (i.e., models 
less than or equal to 35 gallons) that utilize electric resistance 
technology with a mixing valve and set the water heater at a higher 
tank temperature to increase capacity, rather than installing a water 
heater using heat pump technology with a larger volume. In response to 
the concerns raised by the CA IOUs, DOE investigated the theoretical 
effective volume increases that could result from a 35-gallon water 
heater being set to storage water at higher temperatures. DOE 
calculated the effective storage volume of a water heater with a rated 
storage volume of 35 gallons, at various mean tank temperatures, 
according to the effective storage volume calculation methodology 
established in the June 2023 TP Final Rule, assuming that the delivery 
temperature would be maintained at a normal range (120 [deg]F 5 [deg]F). The results are shown in Table V.39.

 Table V.39--Effective Storage Volume of a Water Heater With a 35-Gallon
         Rated Storage Volume at Various Mean Tank Temperatures
------------------------------------------------------------------------
                                                           Veff of water
                                                          heater with 35-
             Mean tank temperature ([deg]F)                  gallon Vr
                                                            (gallons) *
------------------------------------------------------------------------
125.....................................................              35
130.....................................................           ** 38
135.....................................................          *** 41
140.....................................................              44
145.....................................................              47
150.....................................................              50
155.....................................................              53
160.....................................................              56
165.....................................................              59
170.....................................................              62
------------------------------------------------------------------------
* Veff is the effective storage volume. Vr is the rated storage volume.
** If the storage temperature is not greater than 130 [deg]F, then the
  rated effective storage volume is equal to the rated storage volume.
  See section 6.3.1.1 of the appendix E test procedure. This was not
  applied when calculating Veff in this table in order to clearly
  illustrate the impact of increasing the storage tank temperature.
*** If the proposed approach in this NOPR is finalized, a unit
  performing at 135 [deg]F would not need to test per the high
  temperature test method, and thus it would be rated at an effective
  storage volume equal to rated storage volume also.

    As stated before, DOE aims to ensure that the representations of 
UEF, FHR, and effective storage volume are accurate and reflective of 
the typical field application, and also provide a means of direct 
comparison between products which have the same effective capacities 
and cater to the same consumer needs. Based on the expectation that 
smaller electric resistance storage water heaters would be installed 
with mixing valves to compete with larger heat pump water heaters, high 
temperature testing is expected to be representative of typical average 
use cycle for these electric resistance storage water heaters. Hence, 
DOE has tentatively determined that the high temperature test method 
should apply to certain electric resistance storage water heaters that 
are capable of being operated in a permanent mode or setting that 
allows them to provide a larger effective stored volume capacity than 
their physical rated volume.
    However, DOE notes that some electric resistance storage water 
heaters would be unlikely to be operated in a high temperature setting 
for an extended period of time, and for these water heaters DOE has 
tentatively determined that testing at a more typical temperature 
setpoint (125 [deg]F  5 [deg]F) is still representative of 
the average use cycle. These would include water heaters that are 
unable to heat and store water at a setpoint above 135 [deg]F, water 
heaters that only temporarily raise the stored water temperature, and 
demand-response water heaters which only raise the stored water 
temperature in response to demand-response signals. For these types of 
electric resistance storage water heaters, DOE has tentatively 
determined that the high temperature test method would not produce 
results representative of an average use cycle. Therefore, DOE proposes 
that these types would be exempt from the high temperature test method.
    Water heaters are commonly factory-set to a default setting of 120 
[deg]F by manufacturers in order to reduce the risk of scalding, and 
product literature for consumer water heaters typically includes 
warnings about the risk of scaling at setpoint temperatures above 125 
[deg]F. However, as discussed previously, most water heaters have user-
operable thermostat control settings that allow the user to set the 
water heater to heat and store water at temperatures well above 125 
[deg]F. When the water heater is operated in such a manner, 
manufacturers recommend the installation of a mixing valve in order to 
temper the delivery water. Consumers may desire to raise the tank 
storage setpoint higher than 125 [deg]F for a number of reasons. DOE 
found that manufacturers identified the following potential use cases 
for higher-temperature storage in their product literature: (1) 
increasing the hot water delivery capacity of the water heater, (2) 
operation with a clothes washer or dishwasher without its own heating 
element, or (3) to reduce bacterial growth in certain cases. The 
nominal setpoint temperature that is recommended for these types of 
applications is 140 [deg]F. DOE is also aware that some jurisdictions 
may have plumbing codes which mandate a minimum temperature of 140 
[deg]F for storage-type water heaters and indirect-fired hot water 
storage tanks (along with the installation of ASSE 1017-conforming 
mixing valves).\176\
---------------------------------------------------------------------------

    \176\ For example, the city of Nashua, NH has an ordinance 
requiring water heaters to be maintained at a minimum temperature of 
140 [deg]F and be equipped with a temperature-controlling device 
conforming to ASSE 1017. See: https://www.nashuanh.gov/ArchiveCenter/ViewFile/Item/6680.
---------------------------------------------------------------------------

    These findings indicate that the ability to increase the stored 
water temperature can provide consumer utility beyond simply increasing 
capacity (such as for households with dishwashers or clothes washers 
without heating elements, or for households needing to reduce potential 
for bacterial growth). However, as discussed previously, the ability to 
increase capacity by heating and storing water at an elevated 
temperature could result in some consumers choosing to install smaller 
products (i.e., models less than or equal to 35 gallons) that utilize 
electric resistance technology with a mixing valve and set the water 
heater at a higher tank temperature to increase capacity, rather than 
installing a water heater using heat pump technology with a larger 
volume. As shown in Table V.39 storing water at 140 [deg]F would 
increase the effective storage capacity of a 35-gallon tank to 44 
gallons as compared to when the water is stored at 125 [deg]F. DOE 
reasons that water heaters with the ability to heat and store water at 
higher temperatures are increasingly more likely to be used to replace 
larger water

[[Page 49166]]

heaters as the maximum setpoint temperature increases, making high 
temperature testing more representative for water heaters with higher 
maximum temperatures. However, DOE also seeks to avoid negatively 
impacting the product utility for consumers who find utility from 
heating water above 120 [deg]F. DOE, therefore, proposes that water 
heaters not capable of storing water beyond 135 [deg]F would not be 
subject to high temperature testing. DOE tentatively concludes that 
water heaters with a maximum setpoint temperature of 135 [deg]F (or 
lower) would be less likely to be used in a high temperature mode for 
increasing capacity, such that testing in the normal temperature mode 
continues to be representative. In addition, DOE tentatively concludes 
that the ability to heat water up to 135 [deg]F would not impact the 
utility of these products for consumers who desire hotter water for 
certain situations. Therefore, a maximum setpoint temperature of 135 
[deg]F provides balance between preserving utility and limiting the 
likelihood that the unit will be used permanently in a high temperature 
mode to avoid installing a larger water heater that may be subject to 
more stringent standards.
    DOE requests comment on its proposal to exempt from high 
temperature testing any water heaters that cannot heat and store water 
above 135 [deg]F. DOE is particularly interested in whether there would 
be any reduction in product utility if a water heater were to limit the 
maximum setpoint temperature to 135 [deg]F.
    Additionally, some electric resistance water heaters could offer 
high temperature modes that allow for setpoints above the intended 
delivery temperature to boost delivery capacity, but only temporarily 
before automatically reverting to the normal temperature mode. This 
contrasts with several models that are currently available, which 
remain in the high temperature setting until the consumer changes the 
mode or setting to deactivate the high temperature mode. Temporary 
modes would be intended for occasional use in situations in which there 
is a short-term increased demand for hot water, while non-temporary 
modes would be more likely to be used long-term. In the June 2023 TP 
Final Rule, DOE discussed comments it received from stakeholders 
regarding water heaters with high temperature modes. Specifically, 
stakeholders indicated that high temperature modes are not intended to 
be the primary mode of operation and should not be used continuously, 
and that testing in these modes would not reflect their intended use. 
88 FR 40406, 40449.
    DOE understands that temporary high temperature modes would be 
unlikely to be used long-term because they would automatically return 
the setpoint to a more typical temperature after a certain period of 
time has elapsed. Because these temporary modes cannot be used 
permanently, DOE has tentatively determined that units capable of 
storing water at a setpoint above 135 [deg]F only through a temporary, 
consumer-initiated, high temperature mode lasting no longer than 120 
hours should not be subject to high temperature testing. DOE expects 
that such products would operate in non-high temperature modes for the 
majority of the time and therefore testing in the high temperature mode 
would not be representative. DOE is proposing to limit the high 
temperature mode duration to 120 hours as a reasonable amount of time 
that demand may be temporarily higher than normal (such as when guests 
are visiting). Further, DOE expects that models with permanent high 
temperature modes, whether shipped from the factory with that mode as 
the default mode or simply as a user-selectable mode, would be likely 
to be used continuously in the high temperature mode. Therefore, DOE 
tentatively concludes it is representative to test such water heaters 
in the high temperature modes and is proposing to require such testing.
    Additionally, in the June 2023 TP Final Rule, DOE discussed how 
demand-response water heaters can undergo periods of high-temperature 
water storage in response to utility grid signals (i.e., advanced load-
up). In the rulemaking stages prior to the publication of the June 2023 
TP Final Rule, DOE had initially proposed that demand-response water 
heaters would not be subject to high temperature testing, because the 
additional energy consumption from high-temperature water storage is 
compensated for by periods of water heater inactivity (i.e., a 
curtailment period). As such, demand-response water heaters do not 
engage in high-temperature water storage in order to directly increase 
capacity over a representative average use cycle of 24 hours. 88 FR 
40406, 40449. For these reasons, DOE continues to find it appropriate 
to exempt from high temperature testing any water heaters that can only 
heat and store water at temperatures above 135 [deg]F in response to 
instructions received from a utility or third-party demand-response 
program.
    DOE is proposing to amend 10 CFR 429.17(a) to add a requirement 
that representations for all electric storage water heaters that are 
capable of heating and storing water above 135 [deg]F, except for those 
that meet the definition of ``heat pump-type'' water heater,\177\ those 
that are only capable of heating and storing water above 135 [deg]F 
temporarily, or those that that are only capable of heating the stored 
water above 135 [deg]F in response to instructions received from a 
utility or third-party demand-response program, shall be tested using 
the high temperature testing method presented in section 5.1.2 of the 
appendix E test procedure, as amended by the June 2023 TP Final Rule. 
Water heaters that are only capable of heating and storing water above 
135 [deg]F temporarily or are capable of heating the stored water above 
135 [deg]F only in response to instructions received from a utility or 
third-party demand-response program are exempt from this requirement. 
As a result, the UEF, delivery capacity (either FHR or maximum GPM), 
and effective storage volume for electric resistance storage water 
heaters (specifically those which allow the user to increase the 
storage tank temperature) would be determined in accordance with the 
highest tank temperature setting available on the water heater with a 
mixing valve installed. The applicable standard would then be based on 
the effective storage volume as determined during testing. For example 
if high temperature testing yields a delivery capacity corresponding to 
either the low draw pattern or the very small draw pattern and the 
effective storage volume does not exceed 35 gallons, then the standard 
for the small electric storage water heater class, which can be met 
using electric resistance heating elements, would apply to the water 
heater. However, if high temperature testing results in the water 
heater model being in the medium or high draw pattern, or if the 
effective storage volume goes above 35 gallons, then the standards for 
the appropriate class based on the test results, which currently can 
only be met through use of heat pump technology, would apply to the 
water heater.
---------------------------------------------------------------------------

    \177\ The definition of ``water heater'' at 10 CFR 430.2 
specifies heat pump type units have a maximum current rating of 24 
amperes at a voltage no greater than 250 volts, and are products 
designed to transfer thermal energy from one temperature level to a 
higher temperature level for the purpose of heating water, including 
all ancillary equipment such as fans, storage tanks, pumps, or 
controls necessary for the device to perform its function.
---------------------------------------------------------------------------

    DOE requests feedback on its tentative determination that high 
temperature testing should be used for electric resistance storage 
water heaters that offer the user the ability to increase the storage 
tank temperature permanently

[[Page 49167]]

beyond a setpoint of 135 [deg]F. DOE also requests feedback on its 
proposal to exempt from high temperature testing any water heaters that 
cannot heat and store water above 135 [deg]F, or that can only do so 
temporarily for a period of 120-hour or less before returning to the 
normal operating mode, or that can only do so in response to 
instructions received from a utility or third-party demand-response 
program.
2. Circulating Water Heaters
a. Storage Tank for Circulating Heat Pump Water Heaters
    In the June 2023 TP Final Rule, DOE established provisions in 
section 4.10 requiring circulating heat pump water heaters to be tested 
in a pairing with a 40-gallon (5 gallons) electric storage 
water heater in the medium draw pattern that has a UEF rating equal to 
the minimum UEF required at 10 CFR 430.32(d) rounded to the nearest 
0.01. 88 FR 40406, 40467. This test procedure provision was developed 
with feedback from stakeholders stating that an electric resistance 
storage water heater is the most likely type of tank that is paired 
with circulating heat pump water heaters in the field. DOE further 
surmises that it is unlikely for consumers to pair a circulating heat 
pump water heater with an integrated heat pump water heater because 
they would already receive the energy-saving benefits of the integrated 
heat pump water heater. The specifications of the electric storage 
water heater at section 4.10 reflect a baseline electric storage water 
heater in the most prevalent size.
    However, such an electric storage water heater would not comply 
with the proposed standards in this NOPR because products in the medium 
draw pattern would be required to meet UEF levels only achievable by 
heat pump technology. To address this, DOE is proposing to amend 
section 4.10 of the appendix E test procedure to instead require the 
separate storage tank to be a minimally-compliant electric storage 
water heater that is 30 gallons 5 gallons and in the low 
draw pattern to reflect the products which would remain using electric 
resistance heating as a result of the proposed standards.
    DOE requests feedback on the proposed separate storage tank 
requirements for circulating heat pump water heaters.
b. Product-Specific Enforcement Provisions for Circulating Water 
Heaters
    As discussed in section III.B of this document, the June 2023 TP 
Final Rule updated the test method for consumer water heaters to 
provide additional instructions for testing circulating water heaters 
and low-temperature water heaters for UEF, which includes testing with 
a separate tank. 88 FR 40406. The June 2023 TP Final Rule requires 
circulating water heaters to comply with new test procedure once 
amended energy conservation standards are adopted and this NOPR 
proposes to amend the energy conservation standards for these products 
to account for the changes to the test method. Because the separate 
storage tank used for testing to determine the FHR and UEF ratings is 
not part of the basic model number of the circulating water heater, DOE 
is proposing product-specific enforcement provisions to delineate the 
steps that the Department would take to perform testing on a 
circulating water heater. As discussed in the paragraphs that follow, 
DOE intends to test circulating water heaters with a tank that is as 
close as possible to the tank which was used for the certification 
rating.
    First, DOE proposes that the effective storage volume of the 
circulating water heater would be determined during the assessment or 
enforcement test so that, in the case wherein DOE cannot acquire the 
exact tank which was paired for the circulating water heater's rating, 
compliance with standards would be assessed on the basis of the tank 
used during assessment or enforcement testing.
    Second, DOE proposes that, if the manufacturer of the circulating 
water heater certifies the tank that was used to determine the 
circulating water heater's ratings, the Department would use the same 
model of electric storage water heater or unfired hot water storage 
tank as a first step. If this is not possible (e.g., if that tank model 
is discontinued or otherwise unavailable), DOE proposes to test with as 
similar a tank as possible.
    Specifically, for heat pump circulating water heaters, DOE proposes 
to use another eligible electric storage water heater with a rated 
storage volume that is within 3 gallons of the rated 
storage volume of the electric storage water heater used to determine 
the certified ratings of the electric heat pump circulating water 
heater. If that is not possible, DOE proposes to use another eligible 
electric storage water heater.
    For all other circulating water heaters (which would be tested with 
unfired hot water storage tanks), DOE proposes to use another eligible 
unfired hot water storage tank from the same tank manufacturer with the 
same storage volume. If one is not available from that tank 
manufacturer, DOE would next attempt to find a tank with the same 
volume and R-value from another tank manufacturer. If that is not 
successful, DOE proposes to test with an eligible tank from the 
original tank manufacturer, but with a volume that is within 5 gallons of the original tank. Should that also not be feasible, 
the Department proposes that it would use such a tank from a different 
tank manufacturer. Lastly, if there are still no unfired hot water 
storage tanks which meet these descriptions, DOE proposes to test the 
circulating water heater with another eligible unfired hot water 
storage tank (having a certified storage volume between 80 gallons and 
120 gallons and with a certified R-value that meets but does not exceed 
the standard set at 10 CFR 431.110(a)).
    DOE requests feedback on the proposed product-specific enforcement 
provisions for circulating water heaters.
3. Determination of Storage Volume for Water Heaters Less Than 2 
Gallons
    This NOPR proposes to establish new UEF-based standards for 
electric and gas storage-type water heaters with less than 20 gallons 
of effective storage volume. In its market assessment (see chapter 3 of 
the TSD), DOE has found models of consumer electric storage-type water 
heaters which are less than 2 gallons in nominal volume. In order for 
manufacturers to determine compliance for these products, the test 
procedure must include provisions for calculating the rated storage 
volume and effective storage volume.
    The current method to determine storage tank volume in the appendix 
E test procedure, as amended by the June 2023 TP Final Rule, states:

For water heaters with a rated storage volume greater than or equal to 
2 gallons and for separate storage tanks used for testing circulating 
water heaters, determine the storage capacity, of the water heater or 
separate storage tank under test, in gallons (liters), by subtracting 
the tare weight from the gross weight of the storage tank when 
completely filled with water at the supply water temperature specified 
in section 2.3.

(See section 5.2.1 of the amended appendix E test procedure); 88 FR 
40406, 40478.

    However, this method does not explicitly cover storage-type water 
heaters less than 2 gallons which will be covered under the proposed 
new UEF-based standards. Therefore, in this NOPR, DOE is proposing to 
amend section 5.2.1 such that it is applicable to water heaters of all 
volumes and not restricted to only products greater than or equal to 2 
gallons.

[[Page 49168]]

VI. Procedural Issues and Regulatory Review

A. Review Under Executive Orders 12866, 13563 and 14094

    Executive Order (``E.O.'') 12866, ``Regulatory Planning and 
Review,'' 58 FR 51735 (Oct. 4, 1993), as supplemented and reaffirmed by 
E.O. 13563, ``Improving Regulation and Regulatory Review,'' 76 FR 3821 
(Jan. 21, 2011) and amended by E.O. 14094, ``Modernizing Regulatory 
Review,'' 88 FR 21879 (April 11, 2023), requires agencies, to the 
extent permitted by law, to (1) propose or adopt a regulation only upon 
a reasoned determination that its benefits justify its costs 
(recognizing that some benefits and costs are difficult to quantify); 
(2) tailor regulations to impose the least burden on society, 
consistent with obtaining regulatory objectives, taking into account, 
among other things, and to the extent practicable, the costs of 
cumulative regulations; (3) select, in choosing among alternative 
regulatory approaches, those approaches that maximize net benefits 
(including potential economic, environmental, public health and safety, 
and other advantages; distributive impacts; and equity); (4) to the 
extent feasible, specify performance objectives, rather than specifying 
the behavior or manner of compliance that regulated entities must 
adopt; and (5) identify and assess available alternatives to direct 
regulation, including providing economic incentives to encourage the 
desired behavior, such as user fees or marketable permits, or providing 
information upon which choices can be made by the public. DOE 
emphasizes as well that E.O. 13563 requires agencies to use the best 
available techniques to quantify anticipated present and future 
benefits and costs as accurately as possible. In its guidance, the 
Office of Information and Regulatory Affairs (``OIRA'') in the Office 
of Management and Budget (``OMB'') has emphasized that such techniques 
may include identifying changing future compliance costs that might 
result from technological innovation or anticipated behavioral changes. 
For the reasons stated in the preamble, this proposed/final regulatory 
action is consistent with these principles.
    Section 6(a) of E.O. 12866 also requires agencies to submit 
``significant regulatory actions'' to OIRA for review. OIRA has 
determined that this proposed regulatory action constitutes a 
``significant regulatory action'' within the scope of section 3(f)(1) 
of E.O. 12866. Accordingly, pursuant to section 6(a)(3)(C) of E.O. 
12866, DOE has provided to OIRA an assessment, including the underlying 
analysis, of benefits and costs anticipated from the proposed 
regulatory action, together with, to the extent feasible, a 
quantification of those costs; and an assessment, including the 
underlying analysis, of costs and benefits of potentially effective and 
reasonably feasible alternatives to the planned regulation, and an 
explanation why the planned regulatory action is preferable to the 
identified potential alternatives. These assessments are summarized in 
this preamble and further detail can be found in the technical support 
document for this proposed rulemaking.

B. Review Under the Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires 
preparation of an initial regulatory flexibility analysis (``IRFA'') 
for any rule that by law must be proposed for public comment, unless 
the agency certifies that the rule, if promulgated, will not have a 
significant economic impact on a substantial number of small entities. 
As required by E.O. 13272, ``Proper Consideration of Small Entities in 
Agency Rulemaking,'' 67 FR 53461 (Aug. 16, 2002), DOE published 
procedures and policies on February 19, 2003, to ensure that the 
potential impacts of its rules on small entities are properly 
considered during the rulemaking process. 68 FR 7990. DOE has made its 
procedures and policies available on the Office of the General 
Counsel's website (www.energy.gov/gc/office-general-counsel). DOE has 
prepared the following IRFA for the products that are the subject of 
this rulemaking.
    For manufacturers of consumer water heaters, the SBA has set a size 
threshold, which defines those entities classified as ``small 
businesses'' for the purposes of the statute. DOE used the SBA's small 
business size standards to determine whether any small entities would 
be subject to the requirements of the rule. (See 13 CFR part 121.) The 
size standards are listed by North American Industry Classification 
System (``NAICS'') code and industry description and are available at 
www.sba.gov/document/support--table-size-standards. Manufacturing of 
consumer water heaters is classified under NAICS 335220, ``Major 
Household Appliance Manufacturing.'' The SBA sets a threshold of 1,500 
employees or fewer for an entity to be considered as a small business 
for this category.
1. Description of Reasons Why Action Is Being Considered
    EPCA prescribed energy conservation standards for consumer water 
heaters (42 U.S.C. 6295(e)(1)), and directed DOE to conduct two cycles 
of rulemakings \178\ to determine whether to amend these standards. (42 
U.S.C. 6295(e)(4)) EPCA further provides that, not later than 6 years 
after the issuance of any final rule establishing or amending a 
standard, DOE must publish either a notice of determination that 
standards for the product do not need to be amended, or a NOPR 
including new proposed energy conservation standards (proceeding to a 
final rule, as appropriate). (42 U.S.C. 6295(m)(1))
---------------------------------------------------------------------------

    \178\ DOE completed the first of these rulemaking cycles on 
January 17, 2001, by publishing in the Federal Register a final rule 
amending the energy conservation standards for consumer water 
heaters. 66 FR 4474. Subsequently, DOE completed the second 
rulemaking cycle to amend the standards for consumer water heaters 
by publishing a final rule in the Federal Register on April 16, 
2010. 75 FR 20112.
---------------------------------------------------------------------------

2. Objectives of, and Legal Basis for, Rule
    DOE must follow specific statutory criteria for prescribing new or 
amended standards for covered products, including consumer water 
heaters. Any new or amended standard for a covered product must be 
designed to achieve the maximum improvement in energy efficiency that 
the Secretary of Energy determines is technologically feasible and 
economically justified. (42 U.S.C. 6295(o)(2)(A) and 42 U.S.C. 
6295(o)(3)(B)) Furthermore, DOE may not adopt any standard that would 
not result in the significant conservation of energy. (42 U.S.C. 
6295(o)(3)(B))
3. Description on Estimated Number of Small Entities Regulated
    To estimate the number of companies that could be small business 
manufacturers of products covered by this proposed rulemaking, DOE 
conducted a market survey using public information and subscription-
based company reports to identify potential small manufacturers. DOE's 
research involved DOE's Compliance Certification Database 
(``CCD''),\179\ AHRI's Directory of Certified Product Performance,\180\ 
individual company websites, and market research tools

[[Page 49169]]

(e.g., reports from Dun & Bradstreet \56\) to create a list of 
companies that manufacture, produce, import, or assemble the products 
covered by this rulemaking. DOE also asked stakeholders and industry 
representatives if they were aware of any other small manufacturers 
during manufacturer interviews and at DOE public meetings.
---------------------------------------------------------------------------

    \179\ U.S. Department of Energy's Compliance Certification 
Database is available at regulations.doe.gov/certification-data 
(last accessed April 1, 2023).
    \180\ AHRI's Directory of Certified Product Performance is 
available at https://www.ahridirectory.org/Search/SearchHome?ReturnUrl=%2f (last accessed April 1, 2023).
    \56\ The Dun & Bradstreet subscription login is available at 
app.dnbhoovers.com.
---------------------------------------------------------------------------

    DOE identified 22 OEMs of consumer water heaters sold in the United 
States. Of the twenty-two OEMs, DOE identified 2 small, domestic 
manufacturers affected by proposed amended standards for gas-fired 
storage water heater, oil-fired storage water heater, or electric 
storage water heater products. The first small businesses is an OEM of 
oil-fired storage water heaters. The second small business is an OEM of 
electric storage water heaters.
    DOE requests comment the number of small, domestic OEMs in the 
industry.
4. Description and Estimate of Compliance Requirements Including 
Differences in Cost, if Any, for Different Groups of Small Entities
    The first small businesses is an OEM that certifies 3 models of 
oil-fired storage water heaters. One of the three models would meet the 
proposed standard. Given the small and shrinking market for oil-fired 
storage water heaters, DOE does not expect the small manufacturer would 
redesign non-compliant models. Rather, the company would likely reduce 
their range of model offerings. At this point in time, DOE does not 
anticipate significant conversion costs but does solicit input.
    DOE requests comments on the potential impacts of the proposed 
standard on small business manufacturing of oil-fired storage water 
heaters, including the extent of model redesign and manufacturing lines 
changes necessitated by standards.
    The second small business is an OEM that certifies nine models of 
electric storage water heaters. The company offers two small ESWHs, 
four electric storage water heaters with an effective storage volume 
greater than or equal to 20 gallons and less than or equal to 55 
gallons, and three ESWHs with effective storage volumes above 55 
gallons. The two small ESWH models would not require redesign. Three 
non-small ESWHs would not meet the proposed standard, while one of the 
four non-small ESWHs is a heat pump that would require minimal redesign 
to meet the proposed standard. DOE expects the company would expand 
heat pump offering rather than redesign the electric resistance 
products that do not meet the proposed standard. The company offers 
three ESWHs with effective volumes above 55 gallons. All three of these 
are heat pumps but do not meet the proposed standard. After reviewing 
the three ESWHs with effective volumes above 55 gallons, DOE believes 
the three models could be updated to meet the proposed standard. In 
total, the company would need to redesign up to seven models.
    DOE assumed the company would need to invest the equivalent to one 
year of all consumer water heater R&D resources to update its product 
lines. DOE does not anticipate significant capital conversion costs, as 
the company offers a broad line of heat pump ESWHs today. DOE estimates 
total conversion costs to be $200,000 for the small manufacturer. Based 
on market research tools, DOE estimated the company's annual revenue to 
be $10 million. Taking into account the five-year conversion period, 
DOE expects conversion costs to be less than 1% of conversion period 
revenue.
    DOE requests comments on the potential impacts of the proposed 
standard on small business manufacturing of electric storage water 
heaters, including the extent of model redesign and manufacturing lines 
changes necessitated by standards.
    Finally, DOE has tentatively determined that there are no small 
business manufacturers of consumer water heaters which currently have 
EF-based standards and are being transitioned to the UEF metric as 
proposed in this NOPR.
    DOE requests information on whether any small businesses would be 
impacted by the new requirements to determine UEF ratings for consumer 
water heaters that have new UEF-based standards proposed in this 
rulemaking.
5. Duplication, Overlap, and Conflict With Other Rules and Regulations
    DOE is not aware of any rules or regulations that duplicate, 
overlap, or conflict with the proposed rule.
6. Significant Alternatives to the Rule
    The discussion in the previous section analyzes impacts on small 
businesses that would result from DOE's proposed rule, represented by 
TSL 2. In reviewing alternatives to the proposed rule, DOE examined 
energy conservation standards set at lower efficiency levels. While TSL 
1 would reduce the impacts on small business manufacturers, it would 
come at the expense of a reduction in energy savings. TSL 1 achieves 97 
percent lower energy savings compared to the energy savings at TSL 2.
    Based on the presented discussion, establishing standards at TSL 2 
balances the benefits of the energy savings with the potential burdens 
placed on consumer water heater manufacturers, including small business 
manufacturers. Accordingly, DOE does not propose one of the other TSLs 
considered in the analysis, or the other policy alternatives examined 
as part of the regulatory impact analysis and included in chapter 17 of 
the NOPR TSD.
    Additional compliance flexibilities may be available through other 
means. EPCA provides that a manufacturer whose annual gross revenue 
from all of its operations does not exceed $8 million may apply for an 
exemption from all or part of an energy conservation standard for a 
period not longer than 24 months after the effective date of a final 
rule establishing the standard. (42 U.S.C. 6295(t)) Additionally, 
manufacturers subject to DOE's energy efficiency standards may apply to 
DOE's Office of Hearings and Appeals for exception relief under certain 
circumstances. Manufacturers should refer to 10 CFR part 430, subpart 
E, and 10 CFR part 1003 for additional details.

C. Review Under the Paperwork Reduction Act

    Manufacturers of consumer water heaters must certify to DOE that 
their products comply with any applicable energy conservation 
standards. In certifying compliance, manufacturers must test their 
products according to the DOE test procedures for consumer water 
heaters, including any amendments adopted for those test procedures. 
DOE has established regulations for the certification and recordkeeping 
requirements for all covered consumer products and commercial 
equipment, including consumer water heaters. (See generally 10 CFR part 
429). The collection-of-information requirement for the certification 
and recordkeeping is subject to review and approval by OMB under the 
Paperwork Reduction Act (``PRA''). This requirement has been approved 
by OMB under OMB control number 1910-1400. Public reporting burden for 
the certification is estimated to average 35 hours per response, 
including the time for reviewing instructions, searching existing data 
sources, gathering and maintaining the data needed, and completing and 
reviewing the collection of information.
    Notwithstanding any other provision of the law, no person is 
required to respond to, nor shall any person be subject to a penalty 
for failure to comply with, a collection of information subject to the 
requirements of the PRA, unless

[[Page 49170]]

that collection of information displays a currently valid OMB Control 
Number.

D. Review Under the National Environmental Policy Act of 1969

    DOE is analyzing this proposed regulation in accordance with the 
National Environmental Policy Act of 1969 (``NEPA'') and DOE's NEPA 
implementing regulations (10 CFR part 1021). DOE's regulations include 
a categorical exclusion for rulemakings that establish energy 
conservation standards for consumer products or industrial equipment. 
10 CFR part 1021, subpart D, appendix B5.1. DOE anticipates that this 
rulemaking qualifies for categorical exclusion B5.1 because it is a 
rulemaking that establishes energy conservation standards for consumer 
products or industrial equipment, none of the exceptions identified in 
categorical exclusion B5.1(b) apply, no extraordinary circumstances 
exist that require further environmental analysis, and it otherwise 
meets the requirements for application of a categorical exclusion. See 
10 CFR 1021.410. DOE will complete its NEPA review before issuing the 
final rule.

E. Review Under Executive Order 13132

    E.O. 13132, ``Federalism,'' 64 FR 43255 (Aug. 10, 1999), imposes 
certain requirements on Federal agencies formulating and implementing 
policies or regulations that preempt State law or that have federalism 
implications. The Executive order requires agencies to examine the 
constitutional and statutory authority supporting any action that would 
limit the policymaking discretion of the States and to carefully assess 
the necessity for such actions. The Executive order also requires 
agencies to have an accountable process to ensure meaningful and timely 
input by State and local officials in the development of regulatory 
policies that have federalism implications. On March 14, 2000, DOE 
published a statement of policy describing the intergovernmental 
consultation process it will follow in the development of such 
regulations. 65 FR 13735. DOE has examined this proposed rule and has 
tentatively determined that it would not have a substantial direct 
effect on the States, on the relationship between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government. EPCA governs 
and prescribes Federal preemption of State regulations as to energy 
conservation for the products that are the subject of this proposed 
rule. States can petition DOE for exemption from such preemption to the 
extent, and based on criteria, set forth in EPCA. (42 U.S.C. 6297) 
Therefore, no further action is required by Executive Order 13132.

F. Review Under Executive Order 12988

    With respect to the review of existing regulations and the 
promulgation of new regulations, section 3(a) of E.O. 12988, ``Civil 
Justice Reform,'' imposes on Federal agencies the general duty to 
adhere to the following requirements: (1) eliminate drafting errors and 
ambiguity, (2) write regulations to minimize litigation, (3) provide a 
clear legal standard for affected conduct rather than a general 
standard, and (4) promote simplification and burden reduction. 61 FR 
4729 (Feb. 7, 1996). Regarding the review required by section 3(a), 
section 3(b) of E.O. 12988 specifically requires that Executive 
agencies make every reasonable effort to ensure that the regulation: 
(1) clearly specifies the preemptive effect, if any, (2) clearly 
specifies any effect on existing Federal law or regulation, (3) 
provides a clear legal standard for affected conduct while promoting 
simplification and burden reduction, (4) specifies the retroactive 
effect, if any, (5) adequately defines key terms, and (6) addresses 
other important issues affecting clarity and general draftsmanship 
under any guidelines issued by the Attorney General. Section 3(c) of 
Executive Order 12988 requires Executive agencies to review regulations 
in light of applicable standards in section 3(a) and section 3(b) to 
determine whether they are met or it is unreasonable to meet one or 
more of them. DOE has completed the required review and determined 
that, to the extent permitted by law, this proposed rule meets the 
relevant standards of E.O. 12988.

G. Review Under the Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandates Reform Act of 1995 (``UMRA'') 
requires each Federal agency to assess the effects of Federal 
regulatory actions on State, local, and Tribal governments and the 
private sector. Public Law 104-4, section 201 (codified at 2 U.S.C. 
1531). For a proposed regulatory action likely to result in a rule that 
may cause the expenditure by State, local, and Tribal governments, in 
the aggregate, or by the private sector of $100 million or more in any 
one year (adjusted annually for inflation), section 202 of UMRA 
requires a Federal agency to publish a written statement that estimates 
the resulting costs, benefits, and other effects on the national 
economy. (2 U.S.C. 1532(a), (b)) The UMRA also requires a Federal 
agency to develop an effective process to permit timely input by 
elected officers of State, local, and Tribal governments on a proposed 
``significant intergovernmental mandate,'' and requires an agency plan 
for giving notice and opportunity for timely input to potentially 
affected small governments before establishing any requirements that 
might significantly or uniquely affect them. On March 18, 1997, DOE 
published a statement of policy on its process for intergovernmental 
consultation under UMRA. 62 FR 12820. DOE's policy statement is also 
available at www.energy.gov/sites/prod/files/gcprod/documents/umra_97.pdf.
    Although this proposed rule does not contain a Federal 
intergovernmental mandate, it may require expenditures of $100 million 
or more in any one year by the private sector. Such expenditures may 
include: (1) investment in research and development and in capital 
expenditures by consumer water heaters manufacturers in the years 
between the final rule and the compliance date for the new standards 
and (2) incremental additional expenditures by consumers to purchase 
higher-efficiency consumer water heaters, starting at the compliance 
date for the applicable standard.
    Section 202 of UMRA authorizes a Federal agency to respond to the 
content requirements of UMRA in any other statement or analysis that 
accompanies the proposed rule. (2 U.S.C. 1532(c)) The content 
requirements of section 202(b) of UMRA relevant to a private sector 
mandate substantially overlap the economic analysis requirements that 
apply under section 325(o) of EPCA and Executive Order 12866. The 
SUPPLEMENTARY INFORMATION section of this NOPR and the TSD for this 
proposed rule respond to those requirements.
    Under section 205 of UMRA, the Department is obligated to identify 
and consider a reasonable number of regulatory alternatives before 
promulgating a rule for which a written statement under section 202 is 
required. (2 U.S.C. 1535(a)) DOE is required to select from those 
alternatives the most cost-effective and least burdensome alternative 
that achieves the objectives of the proposed rule unless DOE publishes 
an explanation for doing otherwise, or the selection of such an 
alternative is inconsistent with law. As required by 42 U.S.C. 6295(m), 
this proposed rule would establish amended energy conservation 
standards for consumer water heaters that are designed to achieve the 
maximum improvement in energy efficiency that DOE has determined to be 
both technologically feasible and

[[Page 49171]]

economically justified, as required by 6295(o)(2)(A) and 6295(o)(3)(B). 
A full discussion of the alternatives considered by DOE is presented in 
chapter 17 of the TSD for this proposed rule.

H. Review Under the Treasury and General Government Appropriations Act, 
1999

    Section 654 of the Treasury and General Government Appropriations 
Act, 1999 (Pub. L. 105-277) requires Federal agencies to issue a Family 
Policymaking Assessment for any rule that may affect family well-being. 
This rule would not have any impact on the autonomy or integrity of the 
family as an institution. Accordingly, DOE has concluded that it is not 
necessary to prepare a Family Policymaking Assessment.

I. Review Under Executive Order 12630

    Pursuant to E.O. 12630, ``Governmental Actions and Interference 
with Constitutionally Protected Property Rights,'' 53 FR 8859 (Mar. 15, 
1988), DOE has determined that this proposed rule would not result in 
any takings that might require compensation under the Fifth Amendment 
to the U.S. Constitution.

J. Review Under the Treasury and General Government Appropriations Act, 
2001

    Section 515 of the Treasury and General Government Appropriations 
Act, 2001 (44 U.S.C. 3516 note) provides for Federal agencies to review 
most disseminations of information to the public under information 
quality guidelines established by each agency pursuant to general 
guidelines issued by OMB. OMB's guidelines were published at 67 FR 8452 
(Feb. 22, 2002), and DOE's guidelines were published at 67 FR 62446 
(Oct. 7, 2002). Pursuant to OMB Memorandum M-19-15, Improving 
Implementation of the Information Quality Act (April 24, 2019), DOE 
published updated guidelines which are available at www.energy.gov/sites/prod/files/2019/12/f70/DOE%20Final%20Updated%20IQA%20Guidelines%20Dec%202019.pdf. DOE has 
reviewed this NOPR under the OMB and DOE guidelines and has concluded 
that it is consistent with applicable policies in those guidelines.

K. Review Under Executive Order 13211

    E.O. 13211, ``Actions Concerning Regulations That Significantly 
Affect Energy Supply, Distribution, or Use,'' 66 FR 28355 (May 22, 
2001), requires Federal agencies to prepare and submit to OIRA at OMB, 
a Statement of Energy Effects for any proposed significant energy 
action. A ``significant energy action'' is defined as any action by an 
agency that promulgates or is expected to lead to promulgation of a 
final rule, and that (1) is a significant regulatory action under 
Executive Order 12866, or any successor order; and (2) is likely to 
have a significant adverse effect on the supply, distribution, or use 
of energy, or (3) is designated by the Administrator of OIRA as a 
significant energy action. For any proposed significant energy action, 
the agency must give a detailed statement of any adverse effects on 
energy supply, distribution, or use should the proposal be implemented, 
and of reasonable alternatives to the action and their expected 
benefits on energy supply, distribution, and use.
    DOE has tentatively concluded that this regulatory action, which 
proposes amended energy conservation standards for consumer water 
heaters, is not a significant energy action because the proposed 
standards are not likely to have a significant adverse effect on the 
supply, distribution, or use of energy, nor has it been designated as 
such by the Administrator at OIRA. Accordingly, DOE has not prepared a 
Statement of Energy Effects on this proposed rule.

L. Information Quality

    On December 16, 2004, OMB, in consultation with the Office of 
Science and Technology Policy (``OSTP''), issued its Final Information 
Quality Bulletin for Peer Review (``the Bulletin''). 70 FR 2664 (Jan. 
14, 2005). The Bulletin establishes that certain scientific information 
shall be peer reviewed by qualified specialists before it is 
disseminated by the Federal Government, including influential 
scientific information related to agency regulatory actions. The 
purpose of the bulletin is to enhance the quality and credibility of 
the Government's scientific information. Under the Bulletin, the energy 
conservation standards rulemaking analyses are ``influential scientific 
information,'' which the Bulletin defines as ``scientific information 
the agency reasonably can determine will have, or does have, a clear 
and substantial impact on important public policies or private sector 
decisions.'' 70 FR 2664, 2667.
    In response to OMB's Bulletin, DOE conducted formal peer reviews of 
the energy conservation standards development process and the analyses 
that are typically used and has prepared a report describing that peer 
review.\181\ Generation of this report involved a rigorous, formal, and 
documented evaluation using objective criteria and qualified and 
independent reviewers to make a judgment as to the technical/
scientific/business merit, the actual or anticipated results, and the 
productivity and management effectiveness of programs and/or projects. 
Because available data, models, and technological understanding have 
changed since 2007, DOE has engaged with the National Academy of 
Sciences to review DOE's analytical methodologies to ascertain whether 
modifications are needed to improve the Department's analyses. DOE is 
in the process of evaluating the resulting report.\182\
---------------------------------------------------------------------------

    \181\ The 2007 ``Energy Conservation Standards Rulemaking Peer 
Review Report'' is available at the following website: energy.gov/eere/buildings/downloads/energy-conservation-standards-rulemaking-peer-review-report-0 (last accessed April 1, 2023).
    \182\ The report is available at www.nationalacademies.org/our-work/review-of-methods-for-setting-building-and-equipment-performance-standards.
---------------------------------------------------------------------------

VII. Public Participation

A. Attendance at the Public Meeting

    The time and date of the public meeting webinar are listed in the 
DATES section at the beginning of this document.
    Webinar registration information, participant instructions, and 
information about the capabilities available to webinar participants 
will be published on DOE's website at www.energy.gov/eere/buildings/public-meetings-and-comment-deadlines. Participants are responsible for 
ensuring their systems are compatible with the webinar software.

B. Procedure for Submitting Prepared General Statements for 
Distribution

    Any person who has plans to present a prepared general statement 
may request that copies of his or her statement be made available at 
the public meeting. Such persons may submit requests, along with an 
advance electronic copy of their statement in PDF (preferred), 
Microsoft Word or Excel, WordPerfect, or text (ASCII) file format, to 
the appropriate address shown in the ADDRESSES section at the beginning 
of this document. The request and advance copy of statements must be 
received at least one week before the public meeting and are to be 
emailed. Please include a telephone number to enable DOE staff to make 
follow-up contact, if needed.

[[Page 49172]]

C. Conduct of the Public Meeting Webinar

    DOE will designate a DOE official to preside at the public meeting 
webinar and may also use a professional facilitator to aid discussion. 
The webinar will not be a judicial or evidentiary-type public hearing, 
but DOE will conduct it in accordance with section 336 of EPCA. (42 
U.S.C. 6306) A court reporter will be present to record the proceedings 
and prepare a transcript. DOE reserves the right to schedule the order 
of presentations and to establish the procedures governing the conduct 
of the public meeting. There shall not be discussion of proprietary 
information, costs or prices, market share, or other commercial matters 
regulated by U.S. anti-trust laws. After the public meeting webinar, 
interested parties may submit further comments on the proceedings, as 
well as on any aspect of the rulemaking, until the end of the comment 
period.
    The public meeting webinar will be conducted in an informal, 
conference style. DOE will present a general overview of the topics 
addressed in this rulemaking, allow time for prepared general 
statements by participants, and encourage all interested parties to 
share their views on issues affecting this rulemaking. Each participant 
will be allowed to make a general statement (within time limits 
determined by DOE), before the discussion of specific topics. DOE will 
allow, as time permits, other participants to comment briefly on any 
general statements.
    At the end of all prepared statements on a topic, DOE will permit 
participants to clarify their statements briefly. Participants should 
be prepared to answer questions by DOE and by other participants 
concerning these issues. DOE representatives may also ask questions of 
participants concerning other matters relevant to this rulemaking. The 
official conducting the public meeting webinar will accept additional 
comments or questions from those attending, as time permits. The 
presiding official will announce any further procedural rules or 
modification of the previous procedures that may be needed for the 
proper conduct of the public meeting webinar.
    A transcript of the public meeting webinar will be included in the 
docket, which can be viewed as described in the Docket section at the 
beginning of this document and will be accessible on the DOE website. 
In addition, any person may buy a copy of the transcript from the 
transcribing reporter.

D. Submission of Comments

    DOE will accept comments, data, and information regarding this 
proposed rule before or after the public meeting, but no later than the 
date provided in the DATES section at the beginning of this proposed 
rule. Interested parties may submit comments, data, and other 
information using any of the methods described in the ADDRESSES section 
at the beginning of this document.
    Submitting comments via www.regulations.gov. The 
www.regulations.gov web page will require you to provide your name and 
contact information. Your contact information will be viewable to DOE 
Building Technologies staff only. Your contact information will not be 
publicly viewable except for your first and last names, organization 
name (if any), and submitter representative name (if any). If your 
comment is not processed properly because of technical difficulties, 
DOE will use this information to contact you. If DOE cannot read your 
comment due to technical difficulties and cannot contact you for 
clarification, DOE may not be able to consider your comment.
    However, your contact information will be publicly viewable if you 
include it in the comment itself or in any documents attached to your 
comment. Any information that you do not want to be publicly viewable 
should not be included in your comment, nor in any document attached to 
your comment. Otherwise, persons viewing comments will see only first 
and last names, organization names, correspondence containing comments, 
and any documents submitted with the comments.
    Do not submit to www.regulations.gov information for which 
disclosure is restricted by statute, such as trade secrets and 
commercial or financial information (hereinafter referred to as 
Confidential Business Information (``CBI'')). Comments submitted 
through www.regulations.gov cannot be claimed as CBI. Comments received 
through the website will waive any CBI claims for the information 
submitted. For information on submitting CBI, see the Confidential 
Business Information section.
    DOE processes submissions made through www.regulations.gov before 
posting. Normally, comments will be posted within a few days of being 
submitted. However, if large volumes of comments are being processed 
simultaneously, your comment may not be viewable for up to several 
weeks. Please keep the comment tracking number that www.regulations.gov 
provides after you have successfully uploaded your comment.
    Submitting comments via email, hand delivery/courier, or postal 
mail. Comments and documents submitted via email, hand delivery/
courier, or postal mail also will be posted to www.regulations.gov. If 
you do not want your personal contact information to be publicly 
viewable, do not include it in your comment or any accompanying 
documents. Instead, provide your contact information in a cover letter. 
Include your first and last names, email address, telephone number, and 
optional mailing address. The cover letter will not be publicly 
viewable as long as it does not include any comments.
    Include contact information each time you submit comments, data, 
documents, and other information to DOE. If you submit via postal mail 
or hand delivery/courier, please provide all items on a CD, if 
feasible, in which case it is not necessary to submit printed copies. 
No telefacsimiles (``faxes'') will be accepted.
    Comments, data, and other information submitted to DOE 
electronically should be provided in PDF (preferred), Microsoft Word or 
Excel, WordPerfect, or text (ASCII) file format. Provide documents that 
are not secured, that are written in English, and that are free of any 
defects or viruses. Documents should not contain special characters or 
any form of encryption and, if possible, they should carry the 
electronic signature of the author.
    Campaign form letters. Please submit campaign form letters by the 
originating organization in batches of between 50 to 500 form letters 
per PDF or as one form letter with a list of supporters' names compiled 
into one or more PDFs. This reduces comment processing and posting 
time.
    Confidential Business Information. Pursuant to 10 CFR 1004.11, any 
person submitting information that he or she believes to be 
confidential and exempt by law from public disclosure should submit via 
email two well-marked copies: one copy of the document marked 
``confidential'' including all the information believed to be 
confidential, and one copy of the document marked ``non-confidential'' 
with the information believed to be confidential deleted. DOE will make 
its own determination about the confidential status of the information 
and treat it according to its determination.
    It is DOE's policy that all comments may be included in the public 
docket, without change and as received, including any personal 
information provided in the comments (except

[[Page 49173]]

information deemed to be exempt from public disclosure).

E. Issues on Which DOE Seeks Comment

    Although DOE welcomes comments on any aspect of this proposal, DOE 
is particularly interested in receiving comments and views of 
interested parties concerning the following issues:
    (1) DOE requests comment on the methodology used to present the 
change in producer cashflow (INPV) in the monetized benefits and cost 
tables (I.3, I.4, and V.38 of this document).
    (2) DOE requests comment on its proposed deferral of consideration 
of amended, more-stringent standards for circulating water heaters.
    (3) DOE requests comment on its proposal to limit the tabletop 
water heater designation to products in the very small and low draw 
patterns.
    (4) DOE requests comment on the outlook for the emergence of 120 V 
heat pump water heaters, information regarding how their design and 
operation may differ from 240 V heat pump water heaters, and data on 
performance characteristics and efficiencies.
    (5) DOE seeks further information that would assist in potentially 
re-evaluating the stringency of EL 2, especially data regarding the 
technologies employed in 45-gallon medium draw pattern products at a 
UEF of 3.50.
    (6) DOE requests comment on the potential design specifications, 
manufacturing processes, and efficiencies of split-system heat pump 
water heaters.
    (7) DOE requests comment on the analysis assumptions used to 
estimate shipping costs for consumer water heaters.
    (8) DOE requests comment on the cost-efficiency results in this 
engineering analysis.
    (9) DOE requests comment on the analytical approach used to 
determine equivalent baseline standards for circulating water heaters.
    (10) DOE seeks comment from interested parties regarding the 
appropriateness of the converted UEF-based standards presented in Table 
IV.30 and whether products on the market can meet or exceed the 
proposed levels. If products are found to generally exceed the proposed 
levels, the Department requests information and data on the UEF of 
products within these product classes.
    (11) DOE seeks comments about DOE's approach for distribution 
channels and markup values.
    (12) DOE requests comments on its approach for taking into account 
electrification efforts in its shipments analysis.
    (13) DOE requests comments on its approach for developing 
efficiency trends after 2030.
    (14) DOE requests comments on its approach and value of the rebound 
effect for consumer water heaters.
    (15) DOE requests comments on its approach for product price 
projections.
    (16) DOE requests comments on its approach to monetizing the impact 
of the rebound effect.
    (17) DOE requests comments on its approach to estimate low-income 
consumer impacts for higher efficiency standards.
    (18) DOE requests comment on the ability of manufacturers to 
transition to producing heat pump water heaters within the compliance 
window.
    (19) DOE requests comment on the pace at which workforce 
development is expected to install and service the heat pump water 
heater market by the compliance date of the standards.
    (20) DOE requests additional information on the benefits and 
burdens of a potential amended standard for gas-fired instantaneous 
water heaters at EL 3, especially with respect to impacts to 
manufacturers of these products and the ability for industry to convert 
to this efficiency level as being potential burdens to adopting EL 3.
    (21) DOE requests feedback on its tentative determination that high 
temperature testing is only representative of an average 24-hour use 
cycle for electric resistance storage water heaters that offer the user 
the ability to increase the storage tank temperature.
    (22) DOE requests feedback on the proposed separate storage tank 
requirements for circulating heat pump water heaters.
    (23) DOE requests feedback on the proposed product-specific 
enforcement provisions for circulating water heaters.
    (24) DOE requests comments on the potential impacts of the proposed 
standard on small business manufacturing of oil-fired storage water 
heaters, including the extent of model redesign and manufacturing lines 
changes necessitated by standards.
    (25) DOE requests comments on the potential impacts of the proposed 
standard on small business manufacturing of electric storage water 
heaters, including the extent of model redesign and manufacturing lines 
changes necessitated by standards.

VIII. Approval of the Office of the Secretary

    The Secretary of Energy has approved publication of this notice of 
proposed rulemaking and announcement of public meeting.

List of Subjects

10 CFR Part 429

    Administrative practice and procedure, Confidential business 
information, Energy conservation, Household appliances, Imports, 
Intergovernmental relations, Reporting and recordkeeping requirements, 
Small businesses.

10 CFR Part 430

    Administrative practice and procedure, Confidential business 
information, Energy conservation, Household appliances, Imports, 
Intergovernmental relations, Small businesses.

Signing Authority

    This document of the Department of Energy was signed on July 13, 
2023, by Francisco Alejandro Moreno, Acting Assistant Secretary for 
Energy Efficiency and Renewable Energy, pursuant to delegated authority 
from the Secretary of Energy. That document with the original signature 
and date is maintained by DOE. For administrative purposes only, and in 
compliance with requirements of the Office of the Federal Register, the 
undersigned DOE Federal Register Liaison Officer has been authorized to 
sign and submit the document in electronic format for publication, as 
an official document of the Department of Energy. This administrative 
process in no way alters the legal effect of this document upon 
publication in the Federal Register.

    Signed in Washington, DC, on July 14, 2023.
Treena V. Garrett,
Federal Register Liaison Officer, U.S. Department of Energy.

    For the reasons set forth in the preamble, DOE proposes to amend 
parts 429 and 430 of chapter II, subchapter D, of title 10 of the Code 
of Federal Regulations, as set forth below:

PART 429--CERTIFICATION, COMPLIANCE, AND ENFORCEMENT FOR CONSUMER 
PRODUCTS AND COMMERCIAL AND INDUSTRIAL EQUIPMENT

0
1. The authority citation for part 429 continues to read as follows:

    Authority:  42 U.S.C. 6291-6317; 28 U.S.C. 2461 note.

0
2. Amend Sec.  429.17 by adding paragraph (a)(1)(ii)(E) to read as 
follows:


Sec.  429.17  Water heaters.

    (a) * * *

[[Page 49174]]

    (1) * * *
    (ii) * * *
    (E) For an electric storage water heater that has a permanent mode 
or setting in which it is capable of heating and storing water above 
135 [deg]F, where permanent mode or setting means a mode of operation 
that is continuous and does not require any external consumer 
intervention to maintain for longer than 120 hours, except for those 
that meet the definition of ``heat pump-type'' water heater at 10 CFR 
430.2 or that are only capable of heating the stored water above 135 
[deg]F in response to instructions received from a utility or third-
party demand-response program, the following applies:
    (1) To demonstrate compliance with the energy conservation 
standards in 430.32(d)(1), any represented value of uniform energy 
factor shall be determined based on testing in accordance with section 
5.1.1 of appendix E of subpart B to 10 CFR part 430.
    (2) To demonstrate compliance with the energy conservation 
standards in Sec.  430.32(d)(2), any represented value of uniform 
energy factor shall be determined based on high temperature testing in 
accordance with section 5.1.2 of appendix E of subpart B to 10 CFR part 
430.
* * * * *
0
3. Amend Sec.  429.134 by adding paragraph (d)(4) to read as follows:


Sec.  429.134  Product-specific enforcement provisions.

* * * * *
    (d) * * *
    (4) Circulating water heaters. A storage tank for testing will be 
selected as described in paragraphs (i) and (ii). The effective storage 
volume of the circulating water heater determined in testing will be 
measured in accordance with appendix E to subpart B of 10 CFR part 430 
with the storage tank that is used for testing.
    (i) Electric heat pump circulating water heaters. For UEF and 
first-hour rating testing, electric heat pump circulating water heaters 
will be tested with a minimally-compliant electric storage water heater 
(as defined at 10 CFR 430.2) that has a rated storage volume of between 
25 and 35 gallons, and is in the low draw pattern, as determined in 
accordance with appendix E to subpart B of 10 CFR part 430 and the 
standards set at 10 CFR 430.32(d). If the manufacturer certifies the 
specific model of electric storage water heater used for testing to 
determine the certified UEF and first-hour rating of the electric heat 
pump circulating water heater, that model of electric storage water 
heater will be used for testing. If this is not possible (such as if 
the electric storage water heater model is no longer available or has 
been discontinued), testing will be performed with an electric storage 
water heater that has a minimally-compliant UEF rating, in the low draw 
pattern, and a rated storage volume that is within  3 
gallons of the rated storage volume of the electric storage water 
heater used to determine the certified ratings of the electric heat 
pump circulating water heater (but not less than 25 gallons and not 
greater than 35 gallons). If no such model is available, then testing 
will be performed with a minimally-compliant electric storage water 
heater that has a rated storage volume of between 25 and 35 gallons and 
is in the low draw pattern.
    (ii) All other circulating water heaters. For UEF and first-hour 
rating testing, circulating water heaters are paired with unfired hot 
water storage tanks (``UFHWSTs'') that have certified storage volumes 
between 80 and 120 gallons and are at exactly the minimum thermal 
insulation standard, in terms of R-value, for UFHWSTs, as per the 
standards set at 10 CFR 431.110(a). Testing will be performed as 
follows:
    (A) If the manufacturer certifies the specific model of UFHWST used 
for testing to determine the certified UEF and first-hour rating of the 
circulating water heater, that model of UFHWST will be used for 
testing.
    (B) If it is not possible to perform testing with the same model of 
UFHWST certified by the manufacturer, testing will be carried out with 
a different model of UFHWST accordingly:
    (1) Testing will be performed with an UFHWST from the same 
manufacturer as the certified UFHWST, with the same certified storage 
volume as the certified UFHWST, and with a certified R-value that meets 
but does not exceed the standard set at 10 CFR 431.110(a). If this is 
not possible,
    (2) Testing will be performed with an UFHWST from a different 
manufacturer than the certified UFHWST, with the same certified storage 
volume as the certified UFHWST, and with a certified R-value that meets 
but does not exceed the standard set at 10 CFR 431.110(a). If this is 
not possible,
    (3) Testing will be performed with an UFHWST from the same 
manufacturer as the certified UFHWST, having a certified storage volume 
within 5 gallons of the certified UFHWST, and with a 
certified R-value that meets but does not exceed the standard set at 10 
CFR 431.110(a). If this is not possible,
    (4) Testing will be performed with an UFHWST from a different 
manufacturer than the certified UFHWST, having a certified storage 
volume within 5 gallons of the certified UFHWST, and with a 
certified R-value that meets but does not exceed the standard set at 10 
CFR 431.110(a). If this is not possible,
    (5) Testing will be performed with an UFHWST having a certified 
storage volume between 80 gallons and 120 gallons and with a certified 
R-value that meets but does not exceed the standard set at 10 CFR 
431.110(a).
* * * * *

PART 430--ENERGY CONSERVATION PROGRAM FOR CONSUMER PRODUCTS

0
4. The authority citation for part 430 continues to read as follows:

    Authority: 42 U.S.C. 6291-6309; 28 U.S.C. 2461 note.

0
5. Amend Sec.  430.2 by:
0
a. Adding the definitions in alphabetical order of ``Electric 
circulating water heater'', ``Gas-fired circulating water heater'', and 
``Oil-fired circulating water heater''; and
0
b. Revising the definition of ``Tabletop water heater''.
    The revision and additions read as follows:


Sec.  430.2  Definitions.

* * * * *
    Electric circulating water heater means a circulating water heater 
with an input of 12 kW or less; contains no more than one gallon of 
water per 4,000 Btu/h of input (including heat pump-only units with 
power inputs of no more than 24 A at 250 V).
* * * * *
    Gas-fired circulating water heater means a circulating water heater 
with a nominal input of 200,000 Btu/h or less; contains no more than 
one gallon of water per 4,000 Btu/h of input.
* * * * *
    Oil-fired circulating water heater means a circulating water heater 
with a nominal input of 210,000 Btu/h or less; contains no more than 
one gallon of water per 4,000 Btu/h of input.
* * * * *
    Tabletop water heater means a water heater in a rectangular box 
enclosure designed to slide into a kitchen countertop space with 
typical dimensions of 36 inches high, 25 inches deep, and 24 inches 
wide, and with a certified first-hour rating that results in either the 
very small draw pattern or the low draw pattern, as specified in Table 
I at appendix E to this subpart.
* * * * *

[[Page 49175]]

0
6. Amend Sec.  430.23 by revising paragraph (e) to read as follows:


Sec.  430.23  Test procedures for the measurement of energy and water 
consumption.

* * * * *
    (e) Water heaters.
    (1) The estimated annual operating cost is calculated as:
    (i) For a gas-fired or oil-fired water heater, the sum of: The 
product of the annual gas or oil energy consumption, determined 
according to section 6.3.11 or section 6.4.7 of appendix E of this 
subpart, times the representative average unit cost of gas or oil, as 
appropriate, in dollars per Btu as provided by the Secretary; plus the 
product of the annual electric energy consumption, determined according 
to section 6.3.10 or section 6.4.6 of appendix E of this subpart, times 
the representative average unit cost of electricity in dollars per 
kilowatt-hour as provided by the Secretary. Round the resulting sum to 
the nearest dollar per year.
    (ii) For an electric water heater, the product of the annual energy 
consumption, determined according to section 6.3.10 or 6.4.6 of 
appendix E of this subpart, times the representative average unit cost 
of electricity in dollars per kilowatt-hour as provided by the 
Secretary. Round the resulting product to the nearest dollar per year.
    (2) For an individual unit, the uniform energy factor is rounded to 
the nearest 0.01 and determined in accordance with section 6.3.8 or 
section 6.4.4 of appendix E of this subpart.
* * * * *
0
7. Appendix E to subpart B of part 430 is amended by revising the Note, 
sections 4.10, 5.1.2 and 5.2.1 to read as follows:

Appendix E To Subpart B of Part 430--Uniform Test Method for Measuring 
the Energy Consumption of Water Heaters

    Note: Prior to December 18, 2023, representations with respect to 
the energy use or efficiency of consumer water heaters covered by this 
test method, including compliance certifications, must be based on 
testing conducted in accordance with either this appendix as it now 
appears or appendix E as it appeared at 10 CFR part 430, subpart B 
revised as of January 1, 2021. Prior to June 15, 2024, representations 
with respect to the energy use or efficiency of residential-duty 
commercial water heaters covered by this test method, including 
compliance certifications, must be based on testing conducted in 
accordance with either this appendix as it now appears or appendix E as 
it appeared at 10 CFR part 430, subpart B revised as of January 1, 
2021.
    On and after December 18, 2023, representations with respect to 
energy use or efficiency of consumer water heaters covered by this test 
method, including compliance certifications, must be based on testing 
conducted in accordance with this appendix, except as described in the 
paragraphs that follow. On and after June 15, 2024, representations 
with respect to energy use or efficiency of residential-duty commercial 
water heaters covered by this test method, including compliance 
certifications, must be based on testing conducted in accordance with 
this appendix, except as follows.
    Prior to [date 5 years after date of publication of the final rule 
in the Federal Register], consumer water heaters subject to section 
4.10 of this appendix may optionally apply the requirements of section 
4.10 of this appendix. For residential-duty commercial water heaters 
subject to section 4.10 of this appendix the requirements of section 
4.10 of this appendix may optionally be applied prior to the compliance 
date of any final rule reviewing potential amended energy conservation 
standards for this equipment published after June 21, 2023.
    Prior to [date 5 years after date of publication of the final rule 
in the Federal Register], consumer water heaters subject to section 
5.1.2 of this appendix (as specified at 10 CFR 429.17(a)(1)(ii)(E)) may 
optionally apply the requirements of section 5.1.2 of this appendix in 
lieu of the requirements in section 5.1.1 of this appendix.
    On or after [date 5 years after date of publication of the final 
rule in the Federal Register], representations with respect to energy 
use or efficiency of consumer water heaters subject to sections 4.10 
and section 5.1.2 of this appendix must be based on testing conducted 
in accordance with those provisions.

* * * * *
    4.10 Storage Tank Requirement for Circulating Water Heaters. On 
or after the compliance date of a final rule reviewing potential 
amended energy conservation standards for these products published 
after June 21, 2023, when testing a gas-fired, oil-fired, or 
electric resistance circulating water heater (i.e., any circulating 
water heater that does not use a heat pump), the tank to be used for 
testing shall be an unfired hot water storage tank having volume 
between 80 and 120 gallons (364-546 liters) determined using the 
method specified in section 5.2.1 that meets but does not exceed the 
minimum energy conservation standards required according to 10 CFR 
431.110. When testing a heat pump circulating water heater, the tank 
to be used for testing shall be an electric storage water heater 
that has a measured volume of 30 gallons (5 gallons), 
has a First-Hour Rating greater than or equal to 18 gallons and less 
than 51 gallons resulting in classification under the low draw 
pattern, and has a rated UEF equal to the minimum UEF standard 
specified at 10 CFR 430.32(d), rounded to the nearest 0.01. If the 
circulating water heater is supplied with a separate non-integrated 
circulating pump, install this pump as per the manufacturer's 
installation instructions and include its power consumption in 
energy use measurements.
* * * * *
    5. * * *
    5.1.2 High Temperature Testing. This paragraph applies to 
electric storage water heaters that have a permanent mode or setting 
in which the water heater is capable of heating and storing water 
above 135 [deg]F, where permanent mode or setting means a mode of 
operation that is continuous and does not require any external 
consumer intervention to maintain for longer than 120 hours, except 
for those that meet the definition of ``heat pump-type'' water 
heater at 10 CFR 430.2 or that are only capable of heating the 
stored water above 135 [deg]F in response to instructions received 
from a utility or third-party demand-response program.
    For those equipped with factory-installed or built-in mixing 
valves, set the unit to maintain the highest mean tank temperature 
possible while delivering water at 125 [deg]F 5 [deg]F. 
For those not so equipped, install an ASSE 1017-certified mixing 
valve in accordance with the provisions in section 4.3 and adjust 
the valve to deliver water at 125 [deg]F 5 [deg]F when 
the water heater is operating at its highest storage tank 
temperature setpoint. Maintain this setting throughout the entirety 
of the test.
    5.2 * * *
    5.2.1 Determination of Storage Tank Volume. For water heaters 
and separate storage tanks used for testing circulating water 
heaters, determine the storage capacity, Vst, of the 
water heater or separate storage tank under test, in gallons 
(liters), by subtracting the tare weight, Wt, (measured 
while the tank is empty) from the gross weight of the storage tank 
when completely filled with water at the supply water temperature 
specified in section 2.3 of this appendix, Wf, (with all 
air eliminated and line pressure applied as described in section 2.6 
of this appendix) and dividing the resulting net weight by the 
density of water at the measured temperature.
* * * * *
0
8. Amend Sec.  430.32 by revising paragraph (d) to read as follows:


Sec.  430.32  Energy and water conservation standard and their 
compliance dates.

* * * * *
    (d) Water Heaters.
    (1) Prior to [date 5 years after date of publication of the final 
rule in the Federal Register], the uniform energy factor of water 
heaters shall not be less than the following:

[[Page 49176]]



----------------------------------------------------------------------------------------------------------------
                                     Rated storage volume
           Product class             and input rating (if         Draw pattern          Uniform energy factor *
                                         applicable)
----------------------------------------------------------------------------------------------------------------
Gas-fired Storage Water Heater....  >=20 gal and <=55 gal  Very Small................      0.3456-(0.0020 x Vr)
                                                           Low.......................      0.5982-(0.0019 x Vr)
                                                           Medium....................      0.6483-(0.0017 x Vr)
                                                           High......................      0.6920-(0.0013 x Vr)
                                    >55 gal and <=100 gal  Very Small................      0.6470-(0.0006 x Vr)
                                                           Low.......................      0.7689-(0.0005 x Vr)
                                                           Medium....................      0.7897-(0.0004 x Vr)
                                                           High......................      0.8072-(0.0003 x Vr)
Oil-fired Storage Water Heater....  <=50 gal.............  Very Small................      0.2509-(0.0012 x Vr)
                                                           Low.......................      0.5330-(0.0016 x Vr)
                                                           Medium....................      0.6078-(0.0016 x Vr)
                                                           High......................      0.6815-(0.0014 x Vr)
Electric Storage Water Heaters....  >=20 gal and <=55 gal  Very Small................      0.8808-(0.0008 x Vr)
                                                           Low.......................      0.9254-(0.0003 x Vr)
                                                           Medium....................      0.9307-(0.0002 x Vr)
                                                           High......................      0.9349-(0.0001 x Vr)
                                    >55 gal and <=120 gal  Very Small................      1.9236-(0.0011 x Vr)
                                                           Low.......................      2.0440-(0.0011 x Vr)
                                                           Medium....................      2.1171-(0.0011 x Vr)
                                                           High......................      2.2418-(0.0011 x Vr)
Tabletop Water Heater.............  >=20 gal and <=120     Very Small................      0.6323-(0.0058 x Vr)
                                     gal.
                                                           Low.......................      0.9188-(0.0031 x Vr)
                                                           Medium....................      0.9577-(0.0023 x Vr)
                                                           High......................      0.9884-(0.0016 x Vr)
Instantaneous Gas-fired Water       <2 gal and >50,000     Very Small................                      0.80
 Heater.                             Btu/h.
                                                           Low.......................                      0.81
                                                           Medium....................                      0.81
                                                           High......................                      0.81
Instantaneous Electric Water        <2 gal...............  Very Small................                      0.91
 Heater.
                                                           Low.......................                      0.91
                                                           Medium....................                      0.91
                                                           High......................                      0.92
Grid-enabled Water Heater.........  >75 gal..............  Very Small................      1.0136-(0.0028 x Vr)
                                                           Low.......................      0.9984-(0.0014 x Vr)
                                                           Medium....................      0.9853-(0.0010 x Vr)
                                                           High......................      0.9720-(0.0007 x Vr)
----------------------------------------------------------------------------------------------------------------
* Vr is the rated storage volume (in gallons), as determined pursuant to 10 CFR 429.17.

    (2) On or after [date 5 years after date of publication of the 
final rule in the Federal Register], the uniform energy factor of water 
heaters shall not be less than the following:

----------------------------------------------------------------------------------------------------------------
                                     Rated storage volume
           Product class             and input rating (if         Draw pattern          Uniform energy factor *
                                         applicable)
----------------------------------------------------------------------------------------------------------------
Gas-fired Storage Water Heater....  <20 gal..............  Very Small................    0.2062-(0.0020 x Veff)
                                                           Low.......................    0.4893-(0.0027 x Veff)
                                                           Medium....................    0.5758-(0.0023 x Veff)
                                                           High......................    0.6586-(0.0020 x Veff)
                                    >=20 gal and <=55 gal  Very Small................    0.3925-(0.0020 x Veff)
                                                           Low.......................    0.6451-(0.0019 x Veff)
                                                           Medium....................    0.7046-(0.0017 x Veff)
                                                           High......................    0.7424-(0.0013 x Veff)
                                    >55 gal and <=100 gal  Very Small................    0.6470-(0.0006 x Veff)
                                                           Low.......................    0.7689-(0.0005 x Veff)
                                                           Medium....................    0.7897-(0.0004 x Veff)
                                                           High......................    0.8072-(0.0003 x Veff)
                                    >100 gal.............  Very Small................    0.1482-(0.0007 x Veff)
                                                           Low.......................    0.4342-(0.0017 x Veff)
                                                           Medium....................    0.5596-(0.0020 x Veff)
                                                           High......................    0.6658-(0.0019 x Veff)
Oil-fired Storage Water Heater....  <=50 gal.............  Very Small................    0.2909-(0.0012 x Veff)
                                                           Low.......................    0.5730-(0.0016 x Veff)
                                                           Medium....................    0.6478-(0.0016 x Veff)
                                                           High......................    0.7215-(0.0014 x Veff)
                                    >50 gal..............  Very Small................    0.1580-(0.0009 x Veff)
                                                           Low.......................    0.4390-(0.0020 x Veff)
                                                           Medium....................    0.5389-(0.0021 x Veff)
                                                           High......................    0.6172-(0.0018 x Veff)
Very Small Electric Storage Water   <20 gal..............  Very Small................    0.5925-(0.0059 x Veff)
 Heater.
                                                           Low.......................    0.8642-(0.0030 x Veff)

[[Page 49177]]

 
                                                           Medium....................    0.9096-(0.0020 x Veff)
                                                           High......................    0.9430-(0.0012 x Veff)
Small Electric Storage Water        >=20 gal and <=35 gal  Very Small................    0.8808-(0.0008 x Veff)
 Heater.                                                   Low.......................    0.9254-(0.0003 x Veff)
Electric Storage Water Heaters....  >20 and <=55 gal       Very Small................                      2.30
                                     (excluding small      Low.......................                      2.30
                                     electric storage      Medium....................                      2.30
                                     water heaters).       High......................                      2.30
                                    >55 gal and <=120 gal  Very Small................                      2.50
                                                           Low.......................                      2.50
                                                           Medium....................                      2.50
                                                           High......................                      2.50
                                    >120 gal.............  Very Small................    0.3574-(0.0012 x Veff)
                                                           Low.......................    0.7897-(0.0019 x Veff)
                                                           Medium....................    0.8884-(0.0017 x Veff)
                                                           High......................    0.9575-(0.0013 x Veff)
Tabletop Water Heater.............  <20 gal..............  Very Small................    0.5925-(0.0059 x Veff)
                                                           Low.......................    0.8642-(0.0030 x Veff)
                                    >=20 gal and <=120     Very Small................    0.6323-(0.0058 x Veff)
                                     gal.
                                                           Low.......................    0.9188-(0.0031 x Veff)
Instantaneous Gas-fired Water       <2 gal and <=50,000    Very Small................                      0.64
 Heater.                             Btu/h.
                                                           Low.......................                      0.64
                                                           Medium....................                      0.64
                                                           High......................                      0.64
                                    <2 gal and >50,000     Very Small................                      0.89
                                     Btu/h.
                                                           Low.......................                      0.91
                                                           Medium....................                      0.91
                                                           High......................                      0.93
                                    >=2 gal and <=200,000  Very Small................    0.2534-(0.0018 x Veff)
                                     Btu/h.
                                                           Low.......................    0.5226-(0.0022 x Veff)
                                                           Medium....................    0.5919-(0.0020 x Veff)
                                                           High......................    0.6540-(0.0017 x Veff)
Instantaneous Oil-fired Water       <2 gal and <=210,000   Very Small................                      0.61
 Heater.                             Btu/h.
                                                           Low.......................                      0.61
                                                           Medium....................                      0.61
                                                           High......................                      0.61
                                    >=2 gal and <=210,000  Very Small................    0.2780-(0.0022 x Veff)
                                     Btu/h.
                                                           Low.......................    0.5151-(0.0023 x Veff)
                                                           Medium....................    0.5687-(0.0021 x Veff)
                                                           High......................    0.6147-(0.0017 x Veff)
Instantaneous Electric Water        <2 gal...............  Very Small................                      0.91
 Heater.
                                                           Low.......................                      0.91
                                                           Medium....................                      0.91
                                                           High......................                      0.92
                                    >=2 gal..............  Very Small................    0.8086-(0.0050 x Veff)
                                                           Low.......................    0.9123-(0.0020 x Veff)
                                                           Medium....................    0.9252-(0.0015 x Veff)
                                                           High......................    0.9350-(0.0011 x Veff)
Grid-Enabled Water Heater.........  >75 gal..............  Very Small................    1.0136-(0.0028 x Veff)
                                                           Low.......................    0.9984-(0.0014 x Veff)
                                                           Medium....................    0.9853-(0.0010 x Veff)
                                                           High......................    0.9720-(0.0007 x Veff)
Gas-fired Circulating Water Heater  <=200,000 Btu/h......  Very Small................    0.8000-(0.0011 x Veff)
                                                           Low.......................    0.8100-(0.0011 x Veff)
                                                           Medium....................    0.8100-(0.0011 x Veff)
                                                           High......................    0.8100-(0.0011 x Veff)
Oil-fired Circulating Water Heater  <=210,000 Btu/h......  Very Small................    0.6100-(0.0011 x Veff)
                                                           Low.......................    0.6100-(0.0011 x Veff)
                                                           Medium....................    0.6100-(0.0011 x Veff)
                                                           High......................    0.6100-(0.0011 x Veff)
Electric Circulating Water Heater.  <=12 kW; for heat      Very Small................    0.9100-(0.0011 x Veff)
                                     pump type units <=24  Low.......................    0.9100-(0.0011 x Veff)
                                     A at <=250 V.         Medium....................    0.9100-(0.0011 x Veff)
                                                           High......................    0.9200-(0.0011 x Veff)
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* Veff is the Effective Storage Volume (in gallons), as determined pursuant to 10 CFR 429.17.

* * * * *
[FR Doc. 2023-15306 Filed 7-27-23; 8:45 am]
BILLING CODE 6450-01-P