[Federal Register Volume 89, Number 88 (Monday, May 6, 2024)]
[Rules and Regulations]
[Pages 37778-37946]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-09209]



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Vol. 89

Monday,

No. 88

May 6, 2024

Part VI





Department of Energy





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10 CFR Parts 429 and 430





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

  Federal Register / Vol. 89 , No. 88 / Monday, May 6, 2024 / Rules and 
Regulations  

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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: Final rule.

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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 
final rule, DOE is adopting amended energy conservation standards for 
consumer water heaters. It has determined that the new and amended 
energy conservation standards for these products would result in 
significant conservation of energy, and are technologically feasible 
and economically justified.

DATES: The effective date of this rule is July 5, 2024. Compliance with 
the new and amended standards established for consumer water heaters in 
this final rule is required on and after May 6, 2029.

ADDRESSES: The docket for this rulemaking, which includes Federal 
Register notices, public meeting attendee lists and transcripts, 
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.

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 review the docket, 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 Final 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 Standards Rulemaking for Consumer Water Heaters
    3. Scope of This Final Rule
III. General Discussion
    A. General Comments
    1. General Support
    2. General Opposition
    3. Selection of Standards Levels
    B. Scope of Coverage and Definitions
    C. Test Procedure
    D. Technological Feasibility
    1. General
    2. Maximum Technologically Feasible Levels
    E. Energy Savings
    1. Determination of Savings
    2. Significance of Savings
    F. 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
IV. Methodology and Discussion of Related Comments
    A. Market and Technology Assessment
    1. Product Classes
    a. Circulating Water Heaters
    b. Low-Temperature Water Heaters
    c. Storage-Type and Instantaneous-Type Product Classes
    d. Gas-Fired Water Heaters
    e. Very Large Gas-Fired Storage Water Heaters
    f. Electric Storage Water Heaters
    2. Technology Options
    B. Screening Analysis
    1. Screened-Out Technologies
    2. Remaining Technologies
    C. Engineering Analysis
    1. Product Classes With Current UEF-Based Standards
    a. Efficiency Levels
    b. Design Options
    c. Cost Analysis
    d. Shipping Costs
    e. Cost-Efficiency Results
    2. Product Classes Without Current UEF-Based Standards
    a. Crosswalk to Equivalent-Stringency UEF-Based Standards
    b. Consideration of More Stringent Standards
    c. Circulating Water Heaters
    3. Manufacturer Selling Price
    D. Markups Analysis
    E. Energy Use Analysis
    1. Building Sample
    2. Hot Water Use Determination
    3. 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 Storage Water Heater Installation 
Costs
    c. 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. Payback Period Analysis
    10. Accounting for Product Switching
    11. Analytical Results
    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
    2. Senior-Only Households
    3. Small Business Subgroup
    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. Discussion of MIA Comments
    a. Conversion Costs
    b. Cumulative Regulatory Burden
    c. Manufacturing Capacity
    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
    c. Sensitivity Analysis Using Updated SC-GHG Estimates

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    2. Monetization of Other Emissions Impacts
    M. Utility Impact Analysis
    N. Employment Impact Analysis
V. Analytical Results and Conclusions
    A. Trial Standard Levels
    B. 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. National 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
    C. Conclusion
    1. Benefits and Burdens of TSLs Considered for Consumer Water 
Heater Standards
    2. Annualized Benefits and Costs of the Adopted Standards
    3. Conversion Factor Final Rule Enforcement Policy
    4. Severability
    D. Test Procedure Applicability
    1. High-Temperature Testing
    a. Maximum Tank Temperature
    b. Verification of Maximum Tank Temperature
    c. Very Small and Large Electric Storage Water Heaters
    d. Optional Representations for Heat Pump Water Heaters
    e. Temporary Mode
    f. Demand-Response Water Heaters
    g. Summary of the High-Temperature Test Method Applicability
    2. Circulating Water Heaters
    a. Separate Storage Tank Requirements
    b. Product-Specific Enforcement Provisions
    3. Water Heaters Less Than 2 Gallons
    4. Other Topics
VI. Procedural Issues and Regulatory Review
    A. Review Under Executive Orders 12866, 13563, and 14094
    B. Review Under the Regulatory Flexibility Act
    1. Need for, and Objectives of, Rule
    2. Significant Issues Raised by Public Comments in Response to 
the IRFA
    3. Description and Estimated Number of Small Entities Affected
    4. Description of Reporting, Recordkeeping, and Other Compliance 
Requirements
    5. Significant Alternatives Considered and Steps Taken To 
Minimize Significant Economic Impacts on Small Entities
    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
    M. Congressional Notification
VII. Approval of the Office of the Secretary

I. Synopsis of the Final Rule

    The Energy Policy and Conservation Act, Public Law 94-163, as 
amended (``EPCA''),\1\ authorizes DOE to regulate the energy efficiency 
of a number of consumer products and certain industrial equipment. (42 
U.S.C. 6291-6317) 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 rulemaking. As discussed in section II.B.3 of this 
document, DOE is finalizing standards for all consumer water heaters, 
with the exception of gas-fired instantaneous water heaters, in this 
Final Rule.
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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 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 analyzed the benefits and burdens of six trial 
standard levels (``TSLs'') for consumer water heaters. The TSLs and 
their associated benefits and burdens are discussed in detail in 
sections V.A through V.C of this document. As discussed in section V.C 
of this document, DOE has determined that TSL 2 represents the maximum 
improvement in energy efficiency that is technologically feasible and 
economically justified. The adopted standards, which are expressed in 
terms of uniform energy factor (``UEF''), are shown in Table I.1. These 
standards apply to all products listed in Table I.1 and manufactured 
in, or imported into, the United States starting on May 6, 2029.
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A. Benefits and Costs to Consumers

    Table I.2 summarizes DOE's evaluation of the economic impacts of 
the adopted 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 about 15 
years for storage 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.9 of this document). The simple PBP, which is 
designed to compare specific efficiency levels, is measured relative 
to the baseline product (see section IV.C of this document).
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    DOE's analysis of the impacts of the adopted 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 $1,478.8 million 
in 2022$. Under the adopted standards, DOE estimates the change in INPV 
to range

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from -18.6 percent to 1.9 percent, which is a loss of $275.3 million to 
a gain of $28.2 million. In order to bring products into compliance 
with amended standards, it is estimated that industry will incur total 
conversion costs of $239.8 million.
    DOE's analysis of the impacts of the adopted standards on 
manufacturers is described in sections IV.J and V.B.2 of this document.

C. National Benefits and Costs 4
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    \4\ All monetary values in this document are expressed in 2022 
dollars.
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    DOE's analyses indicate that the adopted energy conservation 
standards for consumer water heaters would save a significant amount of 
energy. Relative 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 17.6 quadrillion British 
thermal units (``Btu''), or quads.\5\ This represents a savings of 10 
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.
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    The cumulative net present value (``NPV'') of total consumer 
benefits of the standards for consumer water heaters ranges from $25 
billion (at a 7-percent discount rate) to $82 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 during the 
period 2030-2059.
    In addition, the adopted standards for consumer water heaters are 
projected to yield significant environmental benefits. DOE estimates 
that the standards will result in cumulative emission reductions (over 
the same period as for energy savings) of 332 million metric tons 
(``Mt'') \6\ of carbon dioxide (``CO2''), 90 thousand tons 
of sulfur dioxide (``SO2''), 665 thousand tons of nitrogen 
oxides (``NOX''), 3,058 thousand tons of methane 
(``CH4''), 2.9 thousand tons of nitrous oxide 
(``N2O''), and 0.6 tons of mercury (``Hg'').\7\
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    \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 reflects, to the extent 
possible, laws and regulations adopted through mid-November 2022, 
including the Inflation Reduction Act. See section IV.K of this 
document for further discussion of AEO2023 assumptions that affect 
air pollutant emissions.
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    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''). DOE used interim SC-GHG values (in terms of benefit 
per ton of GHG avoided) developed by an Interagency Working Group on 
the Social Cost of Greenhouse Gases (``IWG'').\8\ 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 $17 
billion. DOE does not have a single central SC-GHG point estimate and 
it emphasizes the value of considering the benefits calculated using 
all four sets of SC-GHG estimates. DOE notes, however, that the adopted 
standards would be economically justified even without inclusion of 
monetized benefits of reduced GHG emissions.
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    \8\ 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 
Intereim Estimates Under Executive Order 13990 published in February 
2021 by the IWG. (``February 2021 SC-GHG TSD''). www.whitehouse.gov/wp-content/uploads/2021/02/Technical/SupportDocument_SocialCostofCarbonMethaneNitrousOxide.pdf.
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    DOE estimated the monetary health benefits of SO2 and 
NOX emissions reductions, using benefit per ton estimates 
from the Environmental Protection Agency,\9\ as discussed in section 
IV.L of this document. DOE estimated the present value of the health 
benefits would be $12 billion using a 7-percent discount rate, and $33 
billion using a 3-percent discount rate.\10\ DOE is currently only 
monetizing health benefits from changes in ambient fine particulate 
matter (PM2.5) concentrations from two precursors 
(SO2 and NOX), and from changes in ambient ozone 
from one precursor (for NOX), but will continue to assess 
the ability to monetize other effects such as health benefits from 
reductions in direct PM2.5 emissions.
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    \9\ U.S. EPA. Estimating the Benefit per Ton of Reducing 
Directly Emitted PM2.5, PM2.5 Precursors and 
Ozone Precursors from 21 Sectors. Available at www.epa.gov/benmap/estimating-benefit-ton-reducing-pm25-precursors-21-sectors.
    \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.
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    Table I.3 summarizes the monetized benefits and costs expected to 
result from the amended 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.
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    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 value of climate and health benefits 
of emission reductions, all annualized.\11\
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    \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., 2020 or 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.
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    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 during the period 2030-2059. The benefits associated 
with reduced emissions achieved as a result of the adopted standards 
are also calculated based on the lifetime of consumer water heaters 
shipped during the period 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 total benefits are 
presented for all four SC-GHG value 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 adopted 
in this rule is $2,623 million per year in increased equipment costs, 
while the estimated annual benefits are $5,655 million in reduced 
equipment operating costs, $1,051 in monetized climate benefits, and 
1,416 in monetized health benefits. In this case, the net benefit would 
amount to $5,499 per year.
    Using a 3-percent discount rate for all benefits and costs, the 
estimated cost of the standards is $2,586 million per year in increased 
equipment costs, while the estimated annual benefits are $7,566 million 
in reduced operating costs, $1,051 million in monetized climate 
benefits, and $2,033 million in monetized health benefits. In this 
case, the net benefit would amount to $8,065 million per year.
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    DOE's analysis of the national impacts of the adopted standards is 
described in sections IV.H, IV.K, and IV.L of this document.

D. Conclusion

    DOE concludes that the standards adopted in this final rule 
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 standard levels are 
already commercially available for all product classes covered by this 
rule. As for economic justification, DOE's analysis shows that the 
estimated benefits of the standards exceed, to a great extent, the 
estimated burdens of the 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 
standards for consumer water heaters is $2,623 million per year in 
increased product costs, while the estimated annual benefits are $5,655 
million in reduced product operating costs, $1,051 million in climate 
benefits, and $1,416 million in health benefits. The net benefit 
amounts to $5,499 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 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.
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    \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).
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    As previously mentioned, the standards are projected to result in 
estimated cumulative national energy savings of 17.6 quads (full-fuel 
cycle (``FFC'')), the equivalent of the primary annual energy use of 
116 million homes. In addition, they are projected to reduce 
CO2 emissions by 332 Mt. Based on these findings, DOE has 
determined the energy savings from the standard levels adopted in this 
final rule are ``significant'' within the meaning of 42 U.S.C. 
6295(o)(3)(B). A more detailed discussion of the basis for these 
conclusions is contained in the remainder of this document and the 
accompanying TSD.

II. Introduction

    The following section briefly discusses the statutory authority 
underlying this final 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 directs DOE to conduct future rulemakings 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))
    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)

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certification and enforcement procedures. Relevant provisions of the 
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 in limited instances 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 statutory 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 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)) 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;
    (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, as codified, 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 during the first year that the 
consumer will receive as a result of the standard, as calculated under 
the applicable test procedure. (42 U.S.C. 6295(o)(2)(B)(iii))
    EPCA, as codified, 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 products 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 such a 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)) In this rulemaking, DOE is applying 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

[[Page 37788]]

EPCA directed DOE to establish a uniform efficiency metric for consumer 
water heaters (see 42 U.S.C. 6295(e)(5)(B)).\13\ The Federal test 
procedure was revised to use a new metric, UEF, in a final rule 
published on July 11, 2014 (the ``July 2014 UEF TP Final Rule''). 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'').
---------------------------------------------------------------------------

    \13\ 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.
BILLING CODE 6450-01-P

[[Page 37789]]

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BILLING CODE 6450-01-C
    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.

[[Page 37790]]

[GRAPHIC] [TIFF OMITTED] TR06MY24.008

2. History of 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.
    On October 21, 2022, DOE received a set of recommendations on 
amended energy conservation standards for consumer water heaters from a 
coalition of seven public- and private-sector organizations, including 
two water heater manufacturers, three energy efficiency organizations, 
one environmental group, and one consumer organization--collectively 
the Joint Stakeholders \14\--which addressed standards for electric 
storage water heaters, gas-fired storage water heaters, and gas-fired 
instantaneous water heaters. This coalition's submission is herein 
referred to as the ``Joint Stakeholder Recommendation.''
---------------------------------------------------------------------------

    \14\ In this final rule, ``Joint Stakeholders'' refers to the 
group of stakeholders who submitted and continued to support the 
October 21, 2022, comment even though the makeup of this group has 
changed since the July 2023 NOPR. Specifically, BWC removed itself 
as a signatory after the July 2023 NOPR.
---------------------------------------------------------------------------

    On July 28, 2023, DOE published in the Federal Register a notice of 
proposed rulemaking (``July 2023 NOPR'') and technical support document 
(``NOPR TSD'') with a 60-day comment period. 88 FR 49058 (Jul. 28, 
2023). In the July 2023 NOPR, DOE proposed new and amended standards 
for consumer water heaters and addressed stakeholder feedback on the 
March 2022 Preliminary Analysis, including the Joint Stakeholder 
Recommendation. On September 13, 2023, DOE presented the proposed 
standards and accompanying analysis at a public meeting.
    DOE received 2,950 comments in response to the July 2023 NOPR from 
interested parties, some of which were docketed together as multiple 
comments or commenters, resulting in a total of 1,140 docketed items. 
Note that of these total comments, 2,800 comments were ``form letter'' 
email submissions. In total, four distinct form letters were received. 
Additionally, several commenters submitted more than one comment to the 
docket. DOE directly references 54 of these written submissions in this 
final rule, which contain substantive comments regarding product 
classes within the scope of this final rule and are shown in Table 
II.3. The remainder of the comments were from individual commenters 
either expressing general opposition or support for the rulemaking. 
Total counts of both supportive and non-supportive comments received 
are included in section III.A of this document.
BILLING CODE 6450-01-P

[[Page 37791]]

[GRAPHIC] [TIFF OMITTED] TR06MY24.009


[[Page 37792]]


[GRAPHIC] [TIFF OMITTED] TR06MY24.010


[[Page 37793]]


[GRAPHIC] [TIFF OMITTED] TR06MY24.011

    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 September 13, 2023, 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).
---------------------------------------------------------------------------

    Additionally, DOE received comments from stakeholders in response 
to the July 2023 NOPR regarding the scope and classification of 
circulating water heaters as defined at 10 CFR 430.2 by the June 2023 
TP Final

[[Page 37794]]

Rule. DOE subsequently published a supplemental notice of proposed 
rulemaking on December 27, 2023 (``December 2023 SNOPR''), that 
discussed the comments received on this topic and proposed to amend the 
definition for ``circulating water heater'' to reclassify these 
products as storage-type water heaters. 88 FR 89330. DOE received 195 
comments in response to the December 2023 SNOPR from interested 
parties. DOE directly references 14 of these written submissions which 
provided remarks about the rulemaking analysis pertinent to standards 
for circulating water heaters or comments relevant to the issues 
discussed in the December 2023 SNOPR, and these submissions are shown 
in Table II.4.
[GRAPHIC] [TIFF OMITTED] TR06MY24.012

BILLING CODE 6450-01-C
3. Scope of This Final Rule
    Following review of comments on the July 2023 NOPR and December 
2023 SNOPR, DOE has decided to finalize at this time standards for all 
consumer water heaters with the exception of gas-fired instantaneous 
water heaters, as defined in 10 CFR 430.2 and replicated in section 
III.B of this final rule. DOE is not summarizing or responding to any 
comments specific to gas-fired instantaneous water heaters in this 
document, nor discussing any analytical methodologies or results for 
this product class as DOE continues to consider the comments submitted 
in response to the July 2023 NOPR and December 2023 SNOPR in informing 
DOE's decision on amended energy conservation standards for GIWHs.

III. General Discussion

    DOE developed this final rule after considering oral and written 
comments, data, and information from interested parties that represent 
a variety of interests. The following discussion addresses issues 
raised by these commenters.

A. General Comments

    This section summarizes general comments received from interested 
parties regarding rulemaking timing and process.
1. General Support
    In response to the July 2023 NOPR, DOE received 966 \16\ general 
comments (those which provided general remarks on the impact of the 
rulemaking) \17\ related to product classes within the scope of this 
final rule, with 931, or 96 percent of, these comments expressing 
support of the proposed standards and a majority acknowledging the 
significant energy savings that would result from the adoption of the 
proposed standards.\18\
---------------------------------------------------------------------------

    \16\ The number of comments reflects the number of individual 
party submissions. Specifically, form letters with multiple 
submissions count each submission individually.
    \17\ Commenters who are directly referenced in this final rule 
and appear in Table II.3 are not counted in these statistics because 
these submitters typically expressed detailed views that could not 
be generalized as either clear support or clear opposition for all 
aspects of the proposal.
    \18\ One comment in support of the proposed standards had 8,357 
signatories.
---------------------------------------------------------------------------

    NYSERDA, GreenTECH, the CA IOUs, NCEL, Joint Regional Advocacy 
Groups, Joint Stakeholders, Joint Utilities, Joint Commenters, Joint 
Advocacy Groups, NYSPSC, Consumer Advocates, Health

[[Page 37795]]

Advocates, Joint Architects, PSR, NEEA and State Agencies all stated 
their support of the standards proposed in the July 2023 NOPR. These 
commenters highlighted the associated benefits of the proposal 
including utility bill savings, reduced GHG emissions, protection of 
human health, reduced energy consumption, and the ability to design 
more energy efficient buildings. (NYSERDA, No. 1192 at p. 1; GreenTECH, 
No. 71 at p. 1; CA IOUs, No. 1175 at pp. 1-2; NCEL, No. 1144 at p. 1; 
Joint Regional Advocacy Groups, No. 1154 at p. 1; Joint Stakeholders, 
No. 1156 at p. 1; Joint Utilities, No. 1158 at p. 1; Joint Commenters, 
No. 1159 at p. 1-2; Joint Advocacy Groups, No. 1165 at p. 1; NYSPSC, 
No. 1169 at p. 1; Consumer Advocates, No. 1172 at p. 1; Health 
Advocates, No. 1179 at p. 1; Joint Architects, No. 1188 at p. 1; PSR, 
No. 1196 at p. 1-2; NEEA, No. 1199 at p. 2; State Agencies, No. 1213 at 
p. 1-2)
    NCEL noted that, according to a report by the Appliance Standards 
Awareness Project, water heaters represent the largest potential for 
emissions reductions among regulated consumer products, and the 
proposed standards would reduce CO2 emissions by more than 
500 Mt over 30 years of sales, helping the United States meet its 
climate goals. (NCEL, No. 1144 at p. 1) The Joint Regional Advocacy 
Groups supported, specifically, the proposed standards for electric 
storage water heaters at heat pump efficiency levels. (Joint Regional 
Advocacy Groups, No. 1154 at p. 1) The Joint State Attorneys General 
also commented in support of the proposed standards for consumer water 
heaters and recommended that DOE finalize the proposed rule as soon as 
possible. The Joint State Attorneys General further emphasized that the 
proposed standards would significantly improve the energy efficiency of 
both electric and gas water heaters while providing economic benefits 
to consumers. The Joint State Attorneys General stated that the 
proposed standards for consumer water heaters are projected to yield 
significant environmental benefits, climate benefits, and monetized 
health benefits. The Joint State Attorneys General also commented that 
the transition to more efficient consumer water heating will be 
increasingly cost effective and affordable as time progresses, 
particularly considering the Federal investment in weatherization, 
energy efficiency, and beneficial electrification programs that would 
help address cost concerns related to installing new or replacement 
products. (Joint State Attorneys General, No. 1035 at pp. 1-3) State 
Agencies claimed that while State regulations have the potential to 
reduce GHG emissions, individual States cannot adopt standards for 
products for which the Federal government has promulgated an existing 
standard (such as consumer water heaters) and that collaboration is 
required for impactful climate action. (State Agencies, No. 1213 at p. 
1) DOE understands the commenter to be referring to provisions at 42 
U.S.C. 6297, by which Federal energy standards supersede State 
regulations with exceptions for certain products that do not include 
consumer water heaters. State Agencies also indicated that the proposed 
standards would reduce the energy burden for low-income households, 
which spend larger portions of their income on energy bills. (State 
Agencies, No. 1213 at p. 2)
    Rheem generally supported DOE's proposed amended standards and the 
analysis behind them but expressed concern regarding potential 
unintended consequences of the proposed standards for certain product 
classes caused in part by the application of the high-temperature test 
method and effective storage volume metric. Rheem suggested possible 
solutions to resolve these issues, which are discussed further in 
section V.D of this document. (Rheem, No. 1177 at p. 1) Rheem stated 
that, for electric storage water heaters between 20 and 120 gallons 
(except for small electric storage water heaters), heat pump-level 
standards are appropriate. Rheem recommended that DOE act to prevent a 
market shift away from heat pump technologies if standards are amended 
to require this for a larger fraction of the electric storage water 
heater market because not only would it result in reduction of energy 
savings, but it also would pose a risk to manufacturers' return on 
investment in heat pump water heater development in a timely manner. 
Rheem noted that there would be significant changes to product design 
and manufacturing facilities as a result of a heat pump standard in 
this rulemaking. (Id. at p. 7)
    The Joint Stakeholders stated that the proposed standards for gas-
fired water heaters are consistent with their recommendations and noted 
that the proposal follows the established rationale that separate 
standards be maintained for gas-fired storage water heaters and their 
instantaneous counterparts. (Joint Stakeholders, No. 1156 at p. 2) 
NEEA, the Joint Regional Advocacy Groups (citing the estimated FFC and 
monetary savings), and Bosch supported the proposed standards for gas-
fired storage water heaters. (NEEA, No. 1199 at p. 9; Joint Regional 
Advocacy Groups, No. 1154 at p. 1; Bosch, No. 1204 at p. 2)
    The CA IOUs encouraged DOE to set more stringent standards for gas-
fired storage water heaters. According to the CA IOUs, more stringent 
standards for all gas-fired consumer water heater sub-classes, 
specifically at condensing efficiencies, would result in significant 
savings of natural gas in California and across the United States. (CA 
IOUs, No. 1175 at p. 2) AWHI also encouraged DOE to set more stringent 
standards for gas-fired storage water heaters. (AWHI, No. 1036 at pp. 
3-4)
    NYSERDA stated that the proposals in the July 2023 NOPR 
substantially aligned with the Joint Stakeholder Recommendation, which 
was supported by NYSERDA. The commenter noted that, by allowing less 
stringent standards for small electric storage water heaters, DOE would 
ensure that there are replacement units available for lowboy water 
heaters, while still allowing innovation and expansion for heat pump 
water heaters. (NYSERDA, No. 1192 at p. 2)
    Additionally, some commenters offered general support in response 
to the December 2023 SNOPR.
    NYSERDA commented that the proposals in the December 2023 SNOPR 
fully address their concerns raised at the NOPR stage regarding the 
potential use of electric resistance circulating water heaters in place 
of heat pump electric storage water heaters. (NYSERDA, No. 1406 at p. 
2) NEEA expressed support for the changes proposed in the December 2023 
SNOPR and urged DOE to move forward with these proposals, as well as 
those made in the July 2023 NOPR. (NEEA, No. 1414 at p. 1) NEEA 
reiterated its support for effective storage volume-based standards and 
high temperature test methods to prevent small, overheated products 
from being used in place of products that meet the proposed standards. 
(NEEA, No. 1414 at p. 2) CEC reiterated its appreciation for DOE's 
efforts to address potential loopholes in the proposed regulatory 
language for circulating water heaters and high temperature test 
methods. (CEC, No. 1412 at p. 2)
2. General Opposition
    Of the 966 general comments DOE received in response to the July 
2023 NOPR related to product classes within the scope of this final 
rule, 29, or 3 percent, were in opposition of new standards, with the 
majority of opposition comments focused on the concerns of government 
overreach and interference with a free market, impacts on product cost, 
and overestimation of energy savings. Commenters also

[[Page 37796]]

expressed concerns about potential outsourcing to foreign companies due 
to the proposed standards, installation costs for gas-fired and heat 
pump water heaters, and the performance of heat pump water heaters. 
These topics are discussed in this section through section III.A.3 of 
this document.
    Ravnitzky supported DOE's efforts to improve the energy efficiency 
of consumer water heaters and reduce greenhouse gas emissions but 
expressed concern for the impact of the proposed standards on consumers 
and manufacturers. Ravnitzky urged DOE to reconsider the proposed 
standards and account for the efficiency potential and resiliency 
benefits of non-heat pump water heaters. (Ravnitzky, No. 73 at p. 1)
    Ravnitzky stated that the proposed standards do not account for the 
resiliency benefits of non-heat pump water heaters, which can operate 
without electricity. Ravnitzky stated that heat pump water heaters 
cannot function during a power outage, which could inconvenience 
consumers and result in health risks. Ravnitzky also stated that gas-
fired water heaters are beneficial to consumers prone to natural 
disasters and extreme weather events that disrupt the power grid 
because they do not require electricity to operate. (Ravnitzky, No. 73 
at p. 1)
    Throughout this rulemaking, DOE has assessed the impacts of 
potential amended standards on consumers and manufacturers, 
specifically quantifying these impacts as national benefits and costs 
(see section I of this document). In response to the concerns raised by 
Ravnitzky, DOE notes that gas-fired water heaters will still be 
available as an option to consumers at the levels adopted in this final 
rule. Further, DOE notes that, while for certain classes of electric 
storage water heaters the adopted standards are currently only met 
through use of heat pump technology, electric storage water heaters 
that rely on electric resistance technology also require a continuous 
supply of electricity to operate. Therefore, without a backup supply of 
electricity a power outage would render both types of electric storage 
water heaters inoperable. DOE also notes that some gas-fired water 
heaters do require electricity to operate. However, as discussed in the 
July 2023 NOPR, DOE maintains its interpretation of EPCA at 42 U.S.C. 
6295(q)(1) that gas-fired water heaters that do not require electricity 
should not be treated differently (i.e., constitute a separate product 
class) from gas-fired water heaters that do. 88 FR 49058, 49079.
    AEI stated its belief that the rule is based on the need to 
confront the global climate crisis, and therefore it is fatally flawed 
and should not be finalized due to the lack of evidence of a climate 
``threat'' or ``crisis.'' (AEI, No. 817 at p. 2)
    DOE is finalizing amendments to the test procedure and energy 
conservation standards for consumer water heaters based on its 
authority described in section II.A of this document, which requires 
the Department to consider seven (7) factors prior to finalizing such 
amendments. This final rule outlines DOE's analysis of all seven 
factors, with additional details provided in the TSD.
    The Attorney General of TN commented that the proposed standards 
have significant federalism implications within the meaning of 
Executive Order 13132 for the following reasons: (1) DOE's standards 
have a preemptive effect on States' procurement standards; and (2) 
States own and purchase water heaters, and therefore the proposed 
standards' effect on water heater costs directly affect States as 
purchasers. (Attorney General of TN, No. 1149 at pp. 2-3) The Attorney 
General of TN commented that DOE must show that the intrastate activity 
covered by the proposed standards substantially affects the interstate 
market for water heaters and there is no such analysis in the July 2023 
NOPR. The Attorney General of TN commented that the proposed standards 
will dominate the regulation of consumer goods--authority traditionally 
belonging to the States. (Attorney General of TN, No. 1149 at p. 3)
    DOE responds that it believes the scope of both the standard 
proposed in the July 2023 NOPR and the amended standard adopted in this 
final rule properly includes all consumer water heaters distributed in 
commerce for personal use or consumption because intrastate state 
activity regulated by 42 U.S.C. 6291(17) and 6302 is inseparable from 
and substantially affects interstate commerce. DOE has clear authority 
under EPCA to regulate the energy use of a variety of consumer products 
and certain commercial and industrial equipment, including the subject 
consumer water heaters. See 42 U.S.C. 6295. Based on this statutory 
authority, DOE has a long-standing practice of issuing energy 
conservation standards with the same scope as the standard in this 
final rule. For example, DOE has maintained a similar scope of products 
in the April 2010 Final Rule and in the December 2016 Conversion Factor 
Final Rule. DOE disagrees with the Attorney General of TN's contention 
that the Commerce Clause, the Tenth Amendment, the Major Questions 
Doctrine, or any canons of statutory construction limit DOE's clear and 
long-standing authority under EPCA to adopt the standard, including its 
scope, in this final rule. A further discussion regarding the Attorney 
General of TN's Federalism concerns can be found at section VI.E of 
this document.
    BWC, a former signatory to the Joint Stakeholder Recommendation, 
urged DOE to reconsider re-aligning certain aspects of its proposal to 
what was originally recommended by the Joint Stakeholder 
Recommendation. (BWC, No. 1164 at p. 1)
    The July 2023 NOPR proposed product classes and efficiency levels 
incorporating the feedback from the Joint Stakeholder Recommendation; 
however, the Department did not align entirely with the Joint 
Stakeholder Recommendation. DOE provided its rationale for product 
class definitions, efficiency level selection, and effective storage 
volume throughout the July 2023 NOPR (see section IV of the July 2023 
NOPR). These topics are discussed further in this final rule in 
sections IV.A.1.f, IV.C.1.a, and V.D.1 of this document, respectively.
    BWC noted that the July 2023 NOPR was published only shortly after 
the June 2023 TP Final Rule, and that this period of time was too short 
for manufacturers to provide adequate feedback on new aspects of the 
test procedure, such as effective storage volume and high temperature 
testing. BWC expressed its concern over this and the 60-day comment 
period provided for the July 2023 NOPR, noting that these were both 
deviations from appendix A. The Gas Association Commenters and Rinnai 
also commented on this deviation, with ASA and the Gas Association 
Commenters stating that the 60-day comment period was insufficient to 
develop responses to the July 2023 NOPR and Rinnai stating that DOE did 
not have an adequate basis to depart from the standard 75-day comment 
period. ASA recommended extending the comment period to provide 
commenters additional time for research and feedback and the Gas 
Association Commenters stated this deviation placed undue burden on 
commenters to review and evaluate a proposal that could have 
significant ramifications on the water heater industry and consumers. 
Rinnai claimed that DOE has rushed the rulemaking process by relying on 
a preliminary TSD from 2022 and not producing a final TSD with the July 
2023 NOPR and believed the compressed schedule between the September 
2023 Webinar and the end of the comment period was

[[Page 37797]]

unjustified (BWC, No. 1164 at pp. 6-7; Gas Association Commenters, No. 
1181, pp. 37-38; Rinnai, No. 1186 at p. 35; ASA, No. 1160 at p. 1) JEA, 
WMU, and Southeast Gas commented that as members of APGA, they 
supported APGA's submitted comments that offer more details on their 
concerns. (JEA, No. 865 at p. 2; WMU, No. 872 at p. 2; Southeast Gas, 
No. 887 at p. 1)
    DOE has determined that the length of the comment period was 
appropriate and provided a meaningful opportunity to comment on the 
NOPR. In the July 2023 NOPR, DOE explained its deviation from section 
6(f)(2) of 10 CFR part 430, subpart C, appendix A,\19\ which specifies 
that the length of the public comment period for a NOPR be not less 
than 75 calendar days. However, with respect to NOPRs, EPCA requires at 
least a 60-day comment period. (42 U.S.C. 6295(p)(2)), and similarly, 
Executive Order (``E.O.'') 12866, ``Regulatory Planning and Review,'' 
58 FR 51735 (Oct. 4, 1993) states that in most cases a comment period 
should not be less than 60 days. On April 8, 2024, DOE published in the 
Federal Register a final rule amending section 6 of appendix A to 
specify that comment periods for standards rulemaking documents will be 
determined on a case-by-case basis with a minimum 60-day comment period 
for NOPRs based on the requirements of EPCA and recommendations in E.O. 
12866. 89 FR 24360 (April 8, 2024). As discussed in the July 2023 NOPR, 
DOE determined that a 60-day comment period provided sufficient time 
because the NOPR relied on many of the same analytical assumptions and 
approaches as used in the preliminary assessment, on which the public 
had an opportunity to comment. 88 FR 49058. In particular, a 60-day 
comment period (followed by 14-day extension) was provided for the 
March 2022 Preliminary Analysis, and a 45-day period for the May 2020 
RFI. 87 FR 11327; 85 FR 30853.
---------------------------------------------------------------------------

    \19\ In reference to appendix A as it appeared at the time of 
the publication of the July 2023 NOPR.
---------------------------------------------------------------------------

    In response to the December 2023 SNOPR, DOE received 176 comments, 
or 90 percent of comments, in opposition of new standards along similar 
concerns as those expressed in response to the July 2023 NOPR.
    DOE also received feedback from some stakeholders that the comment 
period provided for the December 2023 SNOPR was too short. AHRI 
requested that DOE extend the comment period to provide stakeholders 
adequate time to properly respond. (AHRI, No. 1389 at p. 1) BWC stated 
that the opportunity to comment on the December 2023 SNOPR was severely 
limited due to its seasonal timing and comment period duration. (BWC, 
No. 1413 at p. 3) Rinnai stated that there was little meaningful time 
for a detailed assessment of the December 2023 SNOPR due to the timing 
of the comment period and that only a limited number of inputs were 
collected. (Rinnai, No. 1415 at p. 1)
    The scope of the December 2023 SNOPR was limited to a definitional 
change for circulating water heaters, with only two requests for 
comment, and therefore DOE believes the comment period was sufficient. 
The CA IOUs, NEEA, CEC, and NYSERDA expressed support for the December 
2023 SNOPR comment period being limited to 14 days because its scope is 
limited to circulating water heaters. (CA IOUs, No. 1409 at p. 1; NEEA, 
No. 1414 at p. 2; CEC, No. 1412 at p. 3; NYSERDA, No. 1406 at p. 1)
    Additionally, DOE's proposal in the SNOPR was mainly responsive to 
more substantive stakeholder feedback received in response to the July 
2023 NOPR, as discussed throughout that notice (see 88 FR 89330).
    Many individual commenters also expressed concerns regarding the 
implementation of heat pump water heaters due to efficiency concerns in 
colder areas and weather, lack of expertise in maintaining a more 
complex product, reliability, potential for mold, and potentially high 
purchase and installation costs and requirements for a product with the 
same expected lifetime as a standard electric water heater. Individual 
commenters also stated that the proposed standards are 
counterproductive because heat pump water heaters eject cold air into 
the house which then has to be heated up by the household HVAC system. 
Individual commenters stated that consumers may face high costs and 
long wait times associated with retrofitting due to the proposed 
standards, and due to increased insulation, which results in larger 
products. These high costs will increase the cost of home ownership and 
may prevent first-time buyers from obtaining a home.
    DOE accounts for differences between rated efficiency and on-site 
efficiency in its energy use analysis, which considers factors like 
climate and heating load. Heat pump water heaters can help with cooling 
demand in the summer but can work against the home heating system in 
the winter if they are not ducted separately. DOE's energy use analysis 
includes these impacts (see appendix 7B to the TSD). DOE quantifies 
these impacts in the energy use analysis to include them in the 
expected operating expenses for the LCC analysis.
    One individual commenter requested that equipment and repair costs 
be factored into savings and that consumers should decide the return in 
savings when investing in new equipment. (Johnson, No. 1271 at p. 1) 
Great Plains Resource supported the proposed standard and stated that 
if a redesign of water heaters helps to control pollution, it should be 
passed. Great Plains Resource stated, however, that DOE should plan to 
mitigate costs for consumers associated with manufacturers increasing 
costs of water heaters. Other commenters suggested that DOE subsidize 
new water heater technologies or introduce a tax incentive rather than 
seeking energy efficiency through regulations. Great Plains Resource 
suggested that DOE should consider extending the time frame to help 
manufacturers create new equipment and create competition to control 
cost of equipment to consumers. (Great Plains Resource, No. 1267 at p. 
1) An individual commented that condensing gas-fired water heaters use 
expensive vent pipes due to the corrosiveness of condensation. (Harley, 
No. 1341 at p. 1)
    DOE notes that its analysis incorporates installation and equipment 
costs into its analysis, including the necessary venting, as well as 
repair and maintenance costs. Pickering expressed concern that the 
definitions proposed in the December 2023 SNOPR for circulating water 
heaters may not be compatible with solar photovoltaic direct water 
heating systems, which the commenter described as a low-cost system 
where DC electric output from the solar photovoltaic panel is wired 
(without grid connection) directly to the heating elements of an 
electric resistance storage water heater. (Pickering, No. 1399, at pp. 
1-3)
    DOE understands this comment to be opposing the proposed heat pump-
level standards for most electric storage water heaters due to the fact 
that the direct solar photovoltaic water heating systems described by 
the commenter is dependent upon a DC-compatible electric storage water 
heater. DOE notes that electric resistance storage water heaters will 
still be available within the small electric storage water heater (and 
grid-enabled water heater product classes for cases where the home is 
still connected to a utility grid), however.
    According to NPGA, APGA, AGA, and Rinnai, DOE is seeking to promote 
the market for electric heat pumps at the expense of gas-fired water 
heaters, diminishing competition and profoundly affecting consumer 
choice. They also stated that the proposed rule fails to meet EPCA's 3-
year rebuttable

[[Page 37798]]

presumption of economic justification under pure economic terms and 
would be an enormous burden on manufacturing and on competition between 
gas and electric water heaters. (NPGA, APGA, AGA, and Rinnai, No. 441 
at pp. 3-4) EEI noted that while the proposed standards for electric 
storage water heaters increase by 21 to 140 percent in efficiency, the 
July 2023 NOPR only proposed an increase of 0 to 9.7 percent for gas-
fired and oil-fired storage water heaters, and this disparity would 
cause fuel-fired storage water heaters to gain a competitive advantage 
because buyers' decisions are strongly motivated by cost 
considerations. (EEI, No. 1198 at pp. 3-4) Sunrise Pittsburgh stated 
that the proposed standard would require electric and gas-fired water 
heaters to meet vastly different standards, which could potentially 
result in consumers switching to gas-fired water heaters given the 
lower upfront cost associated with gas-fired water heaters compared to 
heat pump water heaters. In turn, Sunrise Pittsburgh stated this may 
result in more carbon emissions. According to Sunrise Pittsburgh, 
revising the proposed standard to apply the same standard across all 
water heaters regardless of the technology or fuel source used would 
benefit consumers, especially it removes gas-fired water heaters from 
the market, as this would save consumers from asthma and carcinogens as 
well as dangerous gas-fired water heater explosions associated with gas 
fueled products. (Sunrise Pittsburgh, No. 905 at pp. 1-2)
    In this rulemaking DOE has provided its analytical approach and 
results which have led to the selection of more stringent standards for 
some product classes compared to others. When determining whether the 
benefits of amended standards outweigh the burdens, DOE considers the 
trial standards levels, which are comprised of different efficiency 
levels for each product class. The construction of trial standards 
levels is discussed in section V.A of this document. In the shipments 
analysis, which is detailed in section IV.G of this document, DOE 
considers the impacts of product life-cycle costs on consumer 
purchasing decisions, which ultimately is used to assess the total 
energy savings, economic impacts to consumers, and impacts to health 
(summarized in section I.C of this document).
    With respect to Sunrise Pittsburgh's suggestion to apply the same 
standard across all water heaters regardless of the technology or fuel 
source, DOE establishes separate standards for different product 
classes of consumer water heaters based on statutory requirements from 
EPCA, which includes a consideration for products that consume 
different types of energy (e.g., electricity, oil, or gas). (42 U.S.C. 
6295(q)(1)-(2)) The product classes established by this final rule are 
discussed in section IV.A.1 of this document.
3. Selection of Standards Levels
    DOE received several comments regarding the selection of proposed 
efficiency levels.
    CEC agreed with DOE's analysis recognizing that the majority of 
electric storage water heaters can meet heat pump-level standards but 
encouraged DOE to consider improving the minimum standard for electric 
storage water heaters >20 and <=55 gal to a level closer to EL 2. CEC 
noted that while a UEF of 2.3 (as proposed) is sufficient to drive the 
core shift in technology, the least efficient heat pump water heaters 
on the market today have a UEF of 2.8 or greater. (CEC, No. 1173 at pp. 
3-4)
    As stated in the July 2023 NOPR, split-system and 120-volt heat 
pump water heaters may not be able to achieve the same efficiency 
levels as conventional 240-volt products, as suggested by less 
stringent ENERGY STAR Residential Water Heaters Specification Version 
5.0 (``ENERGY STAR v5.0'') criteria at 2.20 UEF. DOE has observed 
products certified to both the ENERGY STAR database and DOE's 
Compliance Certification Database (``CCD'') capable of meeting these 
criteria and determined EL 2 such that novel 120-volt products would 
not be prevented from entering the market. 88 FR 49058, 49090. DOE 
continued to consider these factors when evaluating the standard levels 
for this final rule.
    DOE received comments from BWC regarding the potential manufacturer 
impacts and capacity constraints related to transitioning all electric 
storage water heater products to heat pump designs. BWC stated 
appreciation that DOE recognized that a 5-year compliance window may be 
challenging for many manufacturers to redesign 100 percent of electric 
storage water heater products to incorporate heat pump designs. BWC 
noted that change of this scale would indeed require a commitment of 
significant time, resources, and capital to ensure these units can be 
produced at a rate that would satisfy sharply increased demand while 
meeting and exceeding consumers' needs and expectations. (BWC, No. 1164 
at pp. 14-15)
    NRECA recommended that DOE delay implementation of the proposed 
electric storage water heater standard for 40-gallon model sizes to 
allow more time for manufacturers to innovate and design heat pump 
water heaters that are more adaptable to a variety of installation 
scenarios. NRECA also recommended that DOE allow electric resistance 
options for storage tank sizes up to 50 gallons for space constrained 
installations, and that DOE apply the proposed standard for electric 
storage water heaters to new construction only, since new homes can be 
designed to accommodate heat pump water heaters. (NRECA, No. 1127 at p. 
13)
    In response, DOE notes that the timing of amended standards for 
consumer water heaters is mandated by EPCA. Furthermore, DOE finds that 
a 5-year lead time is sufficient for manufacturers to prepare given 
that heat pump water heaters available today can be installed in a 
variety of installation scenarios. For consumer water heaters DOE does 
not have the authority to regulate water heaters in new construction 
only. As discussed in section V.C of this document, DOE has fully 
weighed the burdens of its proposed standards for electric storage 
water heaters against its benefits in determining the appropriate 
standards level.
    DOE acknowledges that requiring all electric storage water heater 
products to utilize heat pump designs would require notably higher 
levels of investment and development effort compared to only requiring 
a portion of the electric storage water heater market to transition to 
heat pump designs. In this final rule, DOE is adopting TSL 2, which, 
for electric storage water heaters, includes standards for larger 
products that are met through the use of heat pump technology while 
leaving standards for smaller products that can be met through the use 
of electric resistance heating. See section V.C.1 of this document for 
the benefits and burdens of the TSLs considered in this rulemaking.
    In this rulemaking, DOE did not analyze more stringent standards 
for product classes for which there are currently no UEF-based 
standards. Several commenters raised the concern that establishing such 
standards for certain product classes and then raising standards for 
other product classes would create a market condition where 
manufacturers can shift their models to meet the requirements of the 
new product classes with less stringent standards, hence undermining 
the energy savings potential of this rulemaking. This issue is 
discussed in detail throughout this document. The creation of separate 
product classes for the models that do not have current

[[Page 37799]]

UEF-based standards is detailed in section IV.A.1 of this document. The 
selection of standards for these products is explained in section 
IV.C.1 of this document. Finally, the impact of market transition 
(i.e., product class switching) is addressed in the shipments analysis 
in section IV.G of this document.
    DOE received comments from some stakeholders regarding the impact 
of the proposed standards for electric storage water heaters (which 
correspond to efficiencies attainable by heat pump water heaters) on 
electric grids.
    Armada claimed that the proposed standards would cause serious 
business harm to companies that provide technologies to convert 
traditional electric storage water heaters into demand-response 
products. (Armada, No. 1193 at p. 3) Armada emphasized the importance 
of American-made technologies for grid-reliability as critical to 
tackling the climate crisis and advancing environmental justice 
initiatives, but these technologies are at risk of being regulated out 
of existence by the proposed standards. (Armada, No. 1193 at p. 7) 
Armada commented that due to the long recovery cycle of heat pump water 
heaters, these products are limited in their demand response 
capabilities. Armada stated that while they can be used for scheduled 
time-of-use programs, they do not work well responding to grid 
congestion or to the intermittent availability of renewable energy 
sources (e.g., wind or solar) because water heater energy use times do 
not line up with when renewable energy resources are available during 
the day. (Armada, No. 1193 at p. 3)
    NRECA stated that heat pump water heaters may be beneficial to 
electrical grid demand peaks because they draw lower demand than 
electric resistance storage water heaters, however they expressed 
concern that heat pump water heaters may not yield enough savings for 
demand response programs to be cost-effective. NRECA also stated that 
most electric cooperatives use load control switches to manage electric 
water heater demand, but have found that this strategy is generally 
incompatible with heat pump water heaters, which take more time to 
reboot after a cut in power than an electric resistance storage water 
heater. NRECA added that heat pump water heater can be managed using 
more sophisticated strategies such as CTA 2045, AHRI 1430, or the 
manufacturer's API; however, NRECA commented that electric cooperatives 
are concerned about the time, expense, and security risks associated 
with implementing a new control strategy. (NRECA, No. 1127 at p. 11) 
NRECA stated many of their member electric cooperatives mitigate demand 
peaks by running demand response programs, using both grid-enabled 
water heaters and 50-gallon electric storage water heaters and added 
that few of the cooperatives they interviewed include or plan to 
include heat pump water heaters, due to incompatible load control 
strategies or reduced grid management benefits. (NRECA, No. 1127 at p. 
11)
    ECSC urged DOE to retain electric resistance options for electric 
storage water heater installations where heat pump water heaters impose 
a time-consuming, costly burden, and to consider restrictions on 
tankless electric water heaters instead. ECSC stated that if consumers 
cannot afford or install heat pump water heaters, the remaining options 
of a small electric storage water heater (``ESWH'') or a tankless 
electric water heater pose a significant threat to existing electric 
grid demand management programs, which rely on electric storage water 
heaters as a thermal resource. ECSC added that the proposed standards 
for electric storage water heaters will likely disproportionately harm 
low-to-moderate income consumers. (ECSC, No. 1185 at p. 2)
    NEEA, however, noted that heat pump water heaters have been 
successfully deployed in demand response programs in the Pacific 
Northwest, and added that, similar to electric resistance storage water 
heaters, heat pump water heaters are capable of shifting load from on-
peak to off-peak hours, and are also capable of handling load-up events 
since they have both electric resistance backup elements and a 
compressor. NEEA cited a pilot program conducted by Bonneville Power 
Administration and Portland General Electric which enrolled 175 heat 
pump water heaters and 90 electric resistance water heaters in a demand 
response program and controlled them through 600 events over the course 
of 220 days. NEEA noted the pilot found that electric resistance and 
heat pump water heaters alike were able to reduce load substantially. 
(NEEA, No. 1199 at pp. 8-9)
    NRECA's comment indicates that utilities may employ more strategies 
for water heater load management than CTA-2045 or OpenADR communication 
protocols. DOE reviewed load control switch technology in more 
detail.\20\ These load control switches appear to be capable of 
implementing schedule-based control. However, if utilities need to cut 
power to water heaters at unplanned times to manage electricity demand, 
heat pump water heaters are expected to still be able to return to 
operation in a reasonable amount of time. DOE's teardown analyses of 
heat pump water heaters on the market show that nearly all heat pump 
water heater designs today have backup electric resistance elements 
should the household require a faster recovery rate. DOE does not 
expect heat pump water heaters to remove these backup elements as a 
result of amended standards. Additionally, DOE finds that the studies 
conducted by NEEA provide evidence towards the compatibility of heat 
pump water heaters with present-day load control strategies.
---------------------------------------------------------------------------

    \20\ See, for example, the Generac ARA Load Control Switch. 
Product literature can be found online at: www.generacgs.com/wp-content/uploads/2023/04/ARA_LoadControlSwitch_SpecSheet_B-1.pdf 
(Last accessed Oct. 11, 2023).
---------------------------------------------------------------------------

    In response to ECSC, there is an increasing number of heat pump 
water heaters available with demand-response capabilities. The ENERGY 
STAR v5.0 specification incentivizes the manufacture of heat pump water 
heaters that meet a list of criteria for connected product design, 
including the use of the standardized CTA-2045 or OpenADR 
communications protocols for utilities to send signals to enrolled 
water heaters. Load management strategies are expected to still be 
compatible with heat pump water heater designs. Additionally, DOE 
reiterates that electric resistance storage water heaters which elevate 
the storage tank temperature beyond 135 [deg]F when responding to 
utility load management signals are exempt from having to test to the 
high temperature test method and will likely remain on the market. 
Beyond small electric storage water heaters and heat pump water 
heaters, grid-enabled water heaters (which are larger than 75 gallons 
of rated storage volume) are designed for this explicit purpose. DOE 
does not expect the availability of grid-enabled water heaters to 
decline as a result of this final rule (because no substantial 
amendments to the standards for these products are being adopted in 
this rulemaking), so there will remain electric resistance products 
available to consumers to connect to utility grid programs.
    NPGA, APGA, AGA, and Rinnai stated that DOE should consider the 
effects the additional demand for electricity for water heaters may 
have on the energy grid as it has presently failed to consider such an 
impact its proposed standards may have on grid reliability. According 
to NPGA, APGA, AGA, and Rinnai, DOE should heed the guidance of the 
Government Accountability Office and analyze options for grid 
resilience to avoid enhanced strain

[[Page 37800]]

without a demand management or supply plan and would benefit by 
reviewing analysis of grid strain during extreme weather events. (NPGA, 
APGA, AGA, and Rinnai, No. 441 at p. 4) NMHC and NAA also advised that 
such an increase in electric product usage should be coupled with 
efforts to ensure the electric grid is prepared and suggested that DOE 
consider the costs and barriers in this rulemaking. (NMHC and NAA, No. 
996 at p. 5)
    DOE does not expect a significant fraction of consumers to switch 
from gas-fired or oil-fired water heaters to electric water heaters as 
a result of this rulemaking. See section IV.F.10 of this document. DOE 
does expect a significant fraction of consumers to switch from electric 
resistance storage water heaters to heat pump water heaters as a result 
of the more stringent standards for electric storage water heaters, 
however. Heat pump water heaters are significantly more efficient than 
electric resistance storage water heaters, and, as a result, consume 
significantly less electricity than electric resistance storage water 
heaters, which actually reduces strain on electrical grids.
    The Attorney General of TN commented that the proposed rulemaking 
does not address the additional strain these standards would place on 
the national energy infrastructure and power grid. The Attorney General 
of TN stated that, by encouraging a 5 percent to 63 percent shift among 
consumers from gas-fired water heaters to those powered by electric 
pumps, the demand for additional electricity will place further stress 
on an already overworked energy grid. (Attorney General of TN, No. 1149 
at p. 3)
    DOE has carefully considered the potential impact of proposed 
standards on the national energy infrastructure and power grid. With 
reduced energy consumption and appropriate configuration, the proposed 
standards would actually benefit national energy infrastructure and 
power grid.

B. Scope of Coverage and Definitions

    As discussed in section II.B.3 of this document, this final rule 
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), with the exception of ``Gas-fired instantaneous water 
heater,'' as codified at 10 CFR 430.2.
    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 (kW) 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,\21\ 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.
---------------------------------------------------------------------------

    \21\ In the June 2023 TP Final Rule, DOE amended the definition 
of ``commercial heat pump water heater'' at 10 CFR 431.102 to align 
with the amperage and voltage requirements for consumer heat pump 
type units as specified in EPCA.
---------------------------------------------------------------------------

    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--
    [cir] Has a rated storage tank volume of more than 75 gallons;
    [cir] Is manufactured on or after April 16, 2015;
    [cir] Is equipped at the point of manufacture with an activation 
lock; and
    [cir] 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

[[Page 37801]]

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 document, EPCA prescribed energy 
conservation standards for all consumer water heaters (i.e., those that 
meet the definition of ``water heater'' above). For the purposes of 
this final rule, DOE is considering all consumer water heaters, as 
defined by EPCA, with the exception of ``gas-fired instantaneous water 
heaters.'' This rulemaking does include consumer water heaters for 
which there are no current UEF-based standards codified at 10 CFR 
430.32(d).
    In the July 2023 NOPR, DOE responded to inquiries concerning 
coverage of hot water dispensing products (not to be confused with low-
temperature electric instantaneous water heaters or point-of-use 
electric storage water heaters), which operate at less than 2 kW of 
power and generally provide water at temperatures between 160 [deg]F 
and 210 [deg]F for food preparation purposes. DOE stated that while it 
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. 88 FR 49058, 49070.
    Additionally, DOE received comments from stakeholders in response 
to the July 2023 NOPR regarding the scope and classification of 
circulating water heater as defined at 10 CFR 430.2 by the June 2023 TP 
Final Rule. DOE subsequently published an SNOPR on December 27, 2023 
(``December 2023 SNOPR''), that discussed the comments received on this 
topic and proposed to amend the definition for ``circulating water 
heater'' to reclassify these products as storage-type water heaters. 88 
FR 89330. In the December 2023 SNOPR, DOE proposed amending the 
definition of ``circulating water heaters'' to re-classify these 
products as storage-type water heaters. Id. After considering the 
comments on the December 2023 SNOPR, DOE is adopting its proposal to 
amend the definition for ``circulating water heater'' as it appears at 
10 CFR 430.2 to reclassify these products as storage-type water 
heaters. The SNOPR comments received from stakeholders and DOE's 
responses, along with the definition of a ``circulating water heater,'' 
are discussed in detail in section IV.A.1.a of this document. As a 
result of this reclassification, the scope of coverage for circulating 
water heaters is limited to those products which meet the statutory 
input rate limits for storage-type water heaters. Specifically, 
electric circulating water heaters must have a nameplate input rating 
of 12 kW or less, gas-fired circulating water heaters must have a 
nameplate input rating of 75,000 Btu/h or less, oil-fired circulating 
water heaters must have a nameplate input rating of 105,000 Btu/h or 
less, and heat pump circulating water heaters must have a maximum 
current rating of 24 amperes (``A'') at a voltage no greater than 250 
volts (``V''). Circulating water heaters that have input rates greater 
than these specifications would be considered commercial water heaters.
    In response to the December 2023 SNOPR, BWC indicated that 
commercial circulating water heaters are not separately defined at 10 
CFR 431.102 and the recent final rule regarding energy conservation 
standards for commercial water heaters \22\ did not establish separate 
standards for circulating water heaters. BWC requested that DOE clarify 
how the provisions in the December 2023 SNOPR will impact commercial 
circulating water heaters if adopted. (BWC, No. 1413 at p. 2) A.O. 
Smith agreed with DOE's determination that circulating water heaters 
with input rates surpassing those defined for consumer storage water 
heaters as outlined in 10 CFR 430.2, should be classified as commercial 
water heaters. A.O. Smith suggested that DOE formalize this 
categorization by establishing definitions for commercial gas-fired 
circulating water heaters with input rates between 75,000 Btu/h and 
200,000 Btu/h at 10 CFR 431.102. (A.O. Smith, No. 1411 at p. 2)
---------------------------------------------------------------------------

    \22\ On October 6, 2023 the Department published a final rule 
amending standards for commercial water heating equipment, including 
commercial circulating water heaters. 88 FR 69686.
---------------------------------------------------------------------------

    Rheem concluded that gas-fired circulating water heaters with input 
rates greater than 75,000 but less than or equal to 105,000 Btu/h could 
be categorized as residential-duty commercial water heating 
equipment,\23\ and therefore could be subject to the energy 
conservation standards recently established in the commercial water 
heater equipment final rule. Rheem requested DOE confirm its 
understanding that the proposed definitions circulating water heaters 
would extend to residential-duty commercial water heaters. (Rheem, No. 
1408 at p. 3)
---------------------------------------------------------------------------

    \23\ DOE defines residential-duty commercial gas-fired storage 
water heaters as commercial gas-fired storage water heaters that are 
not designed to provide outlet hot water at temperatures greater 
than 180 [deg]F, do not have a rated input greater than 105,000 Btu/
h, and do not have a rated storage volume greater than 120 gallons. 
(10 CFR 431.102)
---------------------------------------------------------------------------

    The scope of this rulemaking pertains specifically to consumer 
water heaters, and the amended standards and definitions addressed 
herein do not apply to residential-duty commercial water heaters (which 
are commercial water heating equipment defined at 10 CFR 431.102). The 
definition of circulating water heater DOE is establishing at 10 CFR 
430.2 will be supplemented by additional definitions for electric, gas-
fired, and oil-fired circulating water heaters that specify input rate 
limits consistent with consumer water heaters. Circulating water 
heaters that exceed these input rates will be commercial water heaters 
and therefore are outside the scope of standards established in this 
rulemaking. DOE may consider addressing standards and test procedures 
for commercial circulating water heaters in a future rulemaking for 
commercial water heaters.
    In response to the July 2023 NOPR, the Joint Advocacy Groups urged 
DOE to clarify that electric water heaters that can operate at inputs 
both above and below 12 kW must meet both the relevant consumer and 
commercial water heater standards. (Joint Advocacy Groups, No. 1165 at 
p. 8)
    DOE is aware of certain ``field-convertible'' electric storage 
water heaters which can be sold with elements rated above 12 kW (e.g., 
12.1 kW), but the product is designed in a way that allows the user to 
change the elements to a lower input rate (e.g., 6 kW). Field-
convertible electric storage water heaters are, therefore, sold as 
commercial water heaters but can be converted into consumer water 
heaters.\24\
---------------------------------------------------------------------------

    \24\ For example, Rheem offers a commercial electric water 
heater that is marketed for light-duty commercial applications. In 
certain storage volumes (i.e., 66, 80, and 119.9 gallon models) the 
input rating as shipped from the manufacturer is only available at 
12.1 kW which qualifies the product as a commercial water heater. 
However, the product literature states that this product is factory 
shipped with two 6.05 kW elements that operate simultaneously, but 
can be easily converted in field for non-simultaneous element 
operation. When converted, the input rating would be effectively 
6.05 kW. This causes the product to meet the definition of a 
consumer water heater. For more information see: https://s3.amazonaws.com/WebPartners/ProductDocuments/9A53AD9F-75C2-4E66-8967-1BAE91B17CAC.pdf (Last accessed on Dec. 20, 2023)

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[[Page 37802]]

    Consistent with its determinations in other rulemakings, DOE has 
concluded that if a product can be configured to meet either the 
commercial water heater definition or the consumer water heater 
definition, then it must comply with the standards applicable to all 
types of product/equipment in which it can be configured. For example, 
in a recent final rule addressing convertible consumer refrigeration 
products, DOE specified that if a product is capable of operating with 
compartment temperatures as specified in multiple product category 
definitions (i.e., a ``convertible product''), the model must be tested 
and certified to each applicable product category. 88 FR 7840, 7843 
(Feb. 7, 2023). Also, in a recent final rule addressing the test 
procedure for consumer boilers (which are a space-heating appliance 
that can often also be configured to provide domestic water heating), 
DOE determined that if a combination appliance meets the definition of 
a consumer boiler, the product must be tested per the boiler test 
procedure and demonstrate compliance with those standards. 88 FR 15510, 
15515 (Mar. 13, 2023). Similarly, field-convertible electric storage 
water heaters are subject to the appendix E test procedure and the 
standards adopted by this final rule to the extent that they can be 
configured to meet the consumer water heater definition.
    Uponor stated that other countries have generated domestic hot 
water via a heat exchanger connected to a hydronic mechanical system to 
improve water quality and energy efficiencies for decades. Uponor 
provided product literature from its technology offerings and requested 
clarification about how such products would be covered under DOE's 
standards. (Uponor, No. 606 at p. 1)
    DOE reviewed the product literature cited by the commenter and 
found that the technology being referenced is an unfired heat exchange 
device which can couple hydronic piping to domestic hot water piping 
far downstream of the point of heat generation so that the heat 
exchange can occur in commercial high-rise buildings to produce 
domestic hot water using heat from the building's hydronic heating 
system. While DOE does not disagree that these technologies could 
improve high-rise building system efficiencies, the heat exchangers 
referenced by Uponor may be better characterized as heat recovery 
devices that function based on diverting excess heat to the domestic 
hot water supply and work in conjunction with the appliance providing 
the heat.
    In response to the July 2023 NOPR, DOE received questions from BWC 
asking whether space-heating products that are capable of heating 
domestic hot water by means of an indirect water heater tank would be 
considered circulating water heaters. In response to the December 2023 
SNOPR, Pickering provided comments raising concerns about the potential 
for evaluating efficiency gains if there is overlap between these types 
of systems and circulating water heaters.
    Pickering commented that definitions that do not account for the 
array of equipment that is on the market or coming on the market, and 
that do not recognize the efficiency gains to be had with multiple 
pieces of equipment operating as a system, may limit choice and stifle 
innovation. Specifically, Pickering commented that the proposed 
definitions for circulating water heaters may be incompatible with or 
otherwise create regulatory impediments to air-to-water heat pumps that 
provide domestic hot water as an ancillary function to space 
conditioning. Pickering added that these combined systems can increase 
overall system efficiency over a more typical separated system, but 
that the proposed definitions mean that it may be difficult to quantity 
the efficiency of the domestic hot water function of a combined system 
specifically, and that they may not account for or accommodate the 
combinations of equipment (assembled on site) that produce domestic hot 
water in such a combined system. (Pickering, No. 1399 at pp. 1-3)
    Pickering recommended DOE consider removing indirect tanks from the 
definition of conventional electric storage water heaters, refrain from 
setting water heater efficiency standards for heat pumps that produce 
domestic hot water as an ancillary function, clarify that gas-fueled 
heat pumps are not considered to be electric storage water heaters, and 
take a systems approach to energy efficiency for domestic hot water. 
(Pickering, No. 1399 at p. 3)
    BWC requested that DOE provide answers to the following questions: 
(1) Are split-system heat pump products that provide space heating, as 
well as domestic hot water through an indirect unfired hot water 
storage tank (``UFHWST'') classified as a circulating heat pump water 
heater, or instead as an air-to-water heat pump? (2) Would such a 
product need to be tested under the residential water heater test 
procedure, the air-to-water heat pump test procedure once such a 
procedure is created, or both? (3) Will such a product need to 
represent its efficiency using UEF or annualized fuel utilization 
efficiency, or both? (BWC, No. 1164 at pp. 11-12) While these questions 
pertain specifically to air-to-water heat pump appliances, DOE 
understands the need for general clarification regardless of the fuel 
type or technology.
    Circulating water heaters circulate potable water through a heat 
exchanger: warm water from the stored volume of water enters the 
circulating water heater and exits after being heated to the setpoint 
temperature. By contrast, an indirect water heater uses the main 
furnace or boiler of a home to heat a fluid that is circulated through 
a heat exchanger in the storage tank.\25\ An indirect water heater does 
not circulate the potable domestic hot water supply to and from the 
boiler (it is a separate heating fluid which circulates through the 
tank and boiler), therefore, DOE has determined that a boiler paired 
with an indirect water heater is not a circulating water heater.
---------------------------------------------------------------------------

    \25\ A diagram of an indirect water heater and further 
description of this design configuration is provided on DOE's 
website at: www.energy.gov/energysaver/tankless-coil-and-indirect-water-heaters (Last accessed: Oct. 30, 2023).
---------------------------------------------------------------------------

    Pickering also commented that the proposed definitions for 
circulating water heaters may be incompatible with or otherwise create 
regulatory impediments to solar thermal water heating systems. 
(Pickering, No. 1399 at p. 2)
    DOE understands the commenter to be referring to solar water 
heating systems that circulate a hot heat transfer fluid between a 
solar heat collector and a heat exchanger inside a domestic hot water 
storage tank. Such a setup is parallel to an indirect-fired water 
heater: it is not the potable hot water that circulates between the 
heat source and the tank, it is an intermediate heat transfer fluid 
instead. As such, solar thermal water heating systems designed in this 
way do not constitute circulating water heaters.
    This is in contrast to a boiler with a tankless coil (or a 
combination boiler-water heater). A tankless coil water heater provides 
hot water on demand without a tank, much like an instantaneous water 
heater. When a hot water faucet is turned on, water is heated as it 
flows through a heating coil or heat exchanger installed in a main 
furnace or boiler. In the tankless coil configuration, the domestic hot 
water supply does circulate through the boiler. However, these systems 
are typically flow-activated, and thus most do not meet the definition 
of a ``circulating water heater,'' either.

[[Page 37803]]

    BWC requested clarification on whether air-to-water heat pumps 
would be covered as both circulating water heaters and as hydronic 
heating system boilers, which are being discussed by the U.S. 
Environmental Protection Agency (``EPA'') with regards to amendments to 
the consumer boiler specification. Specifically, BWC called attention 
to the potential overlap between the definition of circulating water 
heater and what the EPA is considering regulating as air-to-water 
(hydronic) heat pumps for space-heating in a potential revision or new 
specification for consumer boilers. BWC stated that both heat pump 
circulating water heaters and hydronic heat pumps are air-to-water heat 
pumps, and there would be an issue if multiple product definitions 
overlapped, thereby encompassing the same covered product within scope 
and subjecting it to two separate test procedures and efficiency 
standards. (BWC, No. 1164 at pp. 11-12)
    There is currently no codified definition for an air-to-water 
hydronic heat pump used for space heating purposes. However, in a March 
2023 final rule amending the test procedure for consumer boilers (the 
``March 2023 Boilers TP Final Rule''), DOE determined that hydronic 
heat pump appliances which meet the consumer boiler definition would be 
classified as consumer boilers. 88 FR 15510, 15516 (Mar. 13, 2023). 
However, the March 2023 Boilers TP Final Rule did not establish a test 
method for these hydronic heat pump boilers. Id. At this time, there is 
no Federal test procedure to determine the Annual Fuel Utilization 
Efficiency (``AFUE'') of such a product, hence, there are also no AFUE 
requirements for these heat pumps. In the March 2023 Boilers TP Final 
Rule, DOE also stated that, to the extent that a combination space and 
water heating product meets the definition of electric boiler or low 
pressure steam or hot water boiler, it is subject to the boilers test 
procedure and energy conservation standards for consumer boilers at 10 
CFR 430.32(e)(2), and must be tested and rated accordingly. Id. at 
15515. Therefore, per DOE's test procedure requirements, if an air-to-
water heat pump meets both the definition of a consumer boiler and a 
consumer water heater, then it must be tested to both test procedures, 
should the boilers test procedure be amended at a future date to 
include an applicable method of test. On June 5, 2023, EPA released a 
Discussion Guide \26\ requesting information from stakeholders about a 
method of test for hydronic heat pump boiler systems. DOE will monitor 
the development of this method of test but notes that it is a draft 
specification that has not been released as of this final rule.
---------------------------------------------------------------------------

    \26\ The Boilers Discussion Guide can be found online at: 
www.energystar.gov/products/residential_boilers_specification (Last 
accessed: Nov. 3, 2023).
---------------------------------------------------------------------------

    RVIA commented that based on the plain language of the consumer 
product statute, appliances designed specifically for use in a 
recreational vehicle (``RV'') are exempted from new standards. RVIA 
urged DOE to continue to recognize the uniqueness of RVs and the 
importance of excluding specific component parts designed for RVs from 
new appliance standards. (RVIA, No. 1168 at p. 4)
    The scope of this rulemaking excludes water heaters designed 
exclusively for RV applications because the definition of ``consumer 
product'' in EPCA excludes consumer products designed solely for use in 
recreational vehicles and other mobile equipment. (See 42 U.S.C. 
6292(a)) In the market and technology assessment, DOE evaluated 
certification data to ensure that the model information used throughout 
this rulemaking analysis aligned with the scope of coverage.
    Section IV.A.1 of this document contains detailed discussion of the 
product classes analyzed in this final rule.

C. 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 most recently amended the test procedure for these products at 
appendix E 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. However, DOE deferred the 
implementation of high-temperature testing provisions to this energy 
conservation standards rulemaking. 88 FR 40406, 40448. DOE also 
established effective storage volume as a metric and provided 
additional optional ambient test conditions for heat pump water 
heaters. Id. 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 
amended test procedure established by the June 2023 TP Final Rule is 
mandatory for consumer water heater testing starting December 18, 2023, 
180 days after publication, with the exception of certain provisions 
(i.e., the new high temperature test method and the circulating water 
heater test method). For these specific provisions, compliance is 
mandatory on and after the compliance date of this final rule. (See 
Note at the beginning of appendix E).

D. 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 (``appendix A'').
    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 
health or safety and (4) unique-pathway proprietary technologies. 
Section 7(b)(2)-(5) of the 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

[[Page 37804]]

basis for the standards considered in this rulemaking. For further 
details on the screening analysis for this rulemaking, see chapter 4 of 
the final rule TSD.
2. Maximum Technologically Feasible Levels
    When DOE proposes to adopt a new or 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 of this final rule and in chapter 5 of 
the final rule TSD.

E. 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 first full year of compliance 
with the amended standards (2030-2059).\27\ The savings are measured 
over the entire lifetime of consumer water heaters purchased in the 30-
year analysis 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.
---------------------------------------------------------------------------

    \27\ DOE also presents a sensitivity analysis that considers 
impacts for products shipped in a 9-year period.
---------------------------------------------------------------------------

    DOE used its national impact analysis (``NIA'') spreadsheet models 
to estimate national energy savings (``NES'') from potential amended 
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 full-fuel-cycle (``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.\28\ 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.2 of this document.
---------------------------------------------------------------------------

    \28\ 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.\29\ 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.
---------------------------------------------------------------------------

    \29\ The numeric threshold for determining the significance of 
energy savings established in a final rule published on Feb. 14, 
2020 (85 FR 8626, 8670) was subsequently eliminated in a final rule 
published on Dec. 13, 2021 (86 FR 70892).
---------------------------------------------------------------------------

    As stated, the standard levels adopted in this final rule are 
projected to result in national energy savings of 17.6 quads, the 
equivalent of the primary annual energy use of 116 million homes. Based 
on the amount of FFC savings, the corresponding reduction in emissions, 
and the need to confront the global climate crisis, DOE has determined 
the energy savings from the standard levels adopted in this final rule 
are ``significant'' within the meaning of 42 U.S.C. 6295(o)(3)(B).

F. 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 rulemaking.
a. Economic Impact on Manufacturers and Consumers
    In determining the impacts of potential new or amended standards 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.
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

[[Page 37805]]

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 cost (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 IV.H 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 adopted 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 standard. (42 U.S.C. 6295(o)(2)(B)(i)(V)) It 
also directs the Attorney General to determine the impact, if any, of 
any lessening of competition likely to result from a 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)) To assist the 
Department of Justice (``DOJ'') in making such a determination, DOE 
transmitted copies of its proposed rule and the NOPR TSD to the 
Attorney General for review, with a request that the DOJ provide its 
determination on this issue. In its assessment letter responding to 
DOE, DOJ concluded that the proposed energy conservation standards for 
consumer water heaters are unlikely to substantially lessen 
competition. DOE is publishing the Attorney General's assessment at the 
end of this final rule.
    In response to the July 2023 NOPR, NPGA, APGA, AGA, and Rinnai 
asserted that the standards proposed in the July 2023 NOPR would have a 
significant market effect, with manufacturers likely choosing to leave 
the market rather than expend the millions of dollars it would take to 
redesign their products and production especially in requiring 
condensing technology in order to be in compliance with the standards 
proposed. (NPGA, APGA, AGA, and Rinnai, No. 441 at p. 3)
    Although commenters focus primarily on condensing technologies as 
it relates to GIWHs, which are not amended in this final rule, DOE 
continued to look at the impact of competition as it relates to the 
other product classes for which DOE is adopting standards in this final 
rule. DOE does not expect that the adopted standard would significantly 
alter the level of concentration in the consumer water heater market. 
Additionally, DOJ stated, in a letter to DOE written in response to the 
July 2023 NOPR, that ``we do not have an evidentiary basis to conclude 
that the proposed energy conservation standards for consumer water 
heaters are likely to substantially lessen competition.'' (See Attorney 
General's assessment at the end of this final rule). For this final 
rule, DOE reviewed up-to-date information on the consumer water heater 
models available on the U.S. market to ensure a comprehensive analysis 
of the current manufacturer landscape. In response to stakeholders' 
comments, DOE carefully reviewed product offerings of original 
equipment manufacturers (``OEMs'') of gas-fired storage water heaters. 
DOE identified five OEMs of gas-fired storage water heaters that would 
be subject to more stringent standards under this rulemaking. Of the 
five OEMs identified, four OEMs currently manufacture gas-fired storage 
water heaters that meet the adopted TSL (EL 2 for gas-fired storage 
water heaters). Collectively, the four OEMs that already offer gas-
fired storage water heaters that meet EL 2 account for approximately 95 
percent of gas-fired storage water heater shipments.
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 adopted 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 adopted 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.B.6 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.

[[Page 37806]]

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 effect potential amended 
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 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.F of this document.

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 subsections 
address each component of DOE's analyses.
    DOE used several analytical tools to estimate the impact of the 
standards considered 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 are 
available on the DOE website for this rulemaking: www.regulations.gov/docket/EERE-2017-BT-STD-0019. Additionally, DOE used output from the 
latest version of the Energy Information Administration's (``EIA's'') 
Annual Energy Outlook (``AEO'') 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 final rule TSD for further discussion of 
the market and technology assessment.
1. Product Classes
    When evaluating and establishing energy conservation standards for 
a type (or class) of covered products, DOE divides covered products 
into product classes by the type of energy used, or by capacity or 
other performance-related features which other products within such 
type (or class) do not have and that justify differing standards. (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, with which compliance was required starting 
on April 16, 2015. 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 and 
effective on August 11, 2015. 80 FR 48004.
    Most recently, the December 2016 Conversion Factor Final Rule, 
published and effective on December 29, 2016, 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, as discussed in that final rule, the standards 
established in EPCA do not place any limitation on the storage volume 
of consumer 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 32 product classes covered in this final rule 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.
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[[Page 37807]]

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[GRAPHIC] [TIFF OMITTED] TR06MY24.014

    The CA IOUs suggested that DOE reconsider its approach to setting 
minimum UEF standards for the water heaters formerly subject to EF 
standards. Citing the provisions in EPCA (42 U.S.C. 6295(q)(1)(B)), the 
CA IOUs stated that DOE must consider capacity, consumer utility, and 
other performance-related features when establishing separate product 
classes for different types of water heaters. The CA IOUs questioned 
whether converting an EF standard to a

[[Page 37808]]

UEF standard should result in a new product class. The commenter urged 
DOE to immediately initiate a new rulemaking to address appropriate 
standards levels or the new product classes, if established. (CA IOUs, 
No. 1175 at p. 5)
    In response to the CA IOUs, DOE originally established these 
product classes in the 2016 Conversion Factor Final Rule. 81 FR 96204, 
96210. At this time, DOE does not have sufficient data to perform an 
analysis of costs versus benefits of subjecting these products to 
standards of the same stringency as the amended standards proposed in 
the July 2023 NOPR. While these products may not have performance-
related ``features'' distinguishing them from currently covered 
products, these models come in different capacities than the products 
for which DOE has already established UEF-based standards. As has been 
observed in DOE's teardown analyses and has been indicated by comments 
from manufacturers, the applicability of efficiency-improving design 
options is often predicated upon the size or capacity of the water 
heater; therefore, at this time, the capacities of these products do 
appear to justify separate standards. However, should future product 
designs demonstrate that the same efficiency-improving design options 
are equally as applicable for these capacities, DOE would consider the 
need for distinguishing these product classes by evaluating whether 
separate standards are justified for these capacities in a future 
standards rulemaking (see 42 U.S.C. 6295(q)(1)(B)).
a. Circulating Water Heaters
    In the June 2023 TP Final Rule, DOE established a definition for 
``circulating 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. In the July 2023 NOPR, DOE identified three potential classes of 
circulating water heater based on fuel type and input ratings derived 
from instantaneous water heater definitions in EPCA at 42 U.S.C. 
6291(27), which are shown in 88 FR 49058, 49077.
    Table IV.3, and proposed their addition to the definitions found at 
10 CFR 430.2. 88 FR 49058, 49077.
[GRAPHIC] [TIFF OMITTED] TR06MY24.015

BILLING CODE 6450-01-C
    As discussed in the June 2023 TP Final Rule, DOE had at that time 
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) met the definitional criteria for instantaneous consumer 
water heaters. As such, these products were to be subject to the 
applicable energy conservation standards; however, DOE previously 
provided an enforcement policy for circulating water heaters.\30\ 
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 proposed in the July 2023 NOPR to establish 
updated UEF standards that reflect the new test method and requested 
feedback on the proposed standards. In response to the July 2023 NOPR, 
DOE received comments that largely suggested that circulating water 
heaters are storage-type water heaters. As noted in section III.B, on 
December 27, 2023, therefore, DOE published the December 2023 SNOPR 
that proposed to reclassify these products as configurations of 
storage-type water heaters, thus proposed that separate product classes 
for circulating water heaters are not required. 88 FR 89330.
---------------------------------------------------------------------------

    \30\ 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.
---------------------------------------------------------------------------

    A ``circulating water heater'' is currently 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.''
    As described in the December 2023 SNOPR, circulating water heaters 
contain very little to no water on their own (i.e., are ``tankless''), 
but, as was determined in the June 2023 TP Final Rule, require a 
separate volume of water in order to function properly when installed 
in the field. In that rulemaking, circulating water heaters were 
designated as instantaneous-type water heaters because of the minimal 
storage volume contained within the product. However, comments received 
in response to the July 2023 NOPR led DOE to reevaluate circulating 
water heaters and propose in the December 2023 SNOPR to classify them 
as storage-type water heaters because they necessarily operate in 
tandem with a stored volume of water; hence, the circulating water 
heater and its separate tank or recirculation loop must be

[[Page 37809]]

treated as one system. When considering the entire system--the 
circulating water heater plus the stored water volume required for its 
operation in the field--these water heaters are operationally very 
similar to storage-type water heaters and, as a result, DOE had 
tentatively determined that it is appropriate to classify them as such 
under its regulations. 88 FR 89330, 89333. The December 2023 SNOPR 
proposed the following revised definition for circulating water 
heaters:
    ``Circulating water heater means a 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 to circulate water 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. Paired with a separate storage 
tank, a circulating water heater constitutes a storage-type water 
heater.''
    88 FR 89330, 89339.
    CEC, BWC, NEEA, NYSERDA, ASAP et al., and A.O. Smith expressed 
support for DOE's tentative determination that circulating water 
heaters be considered storage-type water heaters and subject to the 
appropriate standards. (CEC, No. 1412 at pp. 1-2; BWC, No. 1413 at p. 
1; NEEA, No. 1414 at p. 2; NYSERDA, No. 1406 at p. 2; ASAP et al., No. 
1407 at pp. 1-2; A.O. Smith, No. 1411 at p. 2) NEEA and ASAP et al. 
noted that, compared to other storage-type water heaters, circulating 
water heaters do not provide any additional utility or performance-
related features that would warrant a separate product class. (NEEA, 
No. 1414 at p. 2; ASAP et al., No. 1407 at pp. 1-2) NEEA and A.O. Smith 
commented that defining circulating water heaters as storage-type will 
address concerns regarding these products potentially being used as a 
circumvention pathway for more stringent storage-type standards. (NEEA, 
No. 1414 at p. 2; A.O. Smith, No. 1411 at p. 2) A.O. Smith added that 
this will provide more business certainty. (A.O. Smith, No. 1411 at p. 
2)
    DOE specifically requested comment and information on whether gas-
fired circulating water heaters could offer the same utility as gas-
fired instantaneous water heaters. 88 FR 89330, 89334. DOE sought to 
understand whether gas-fired circulating water heaters could be a 
potential loophole to gas-fired instantaneous water heater standards 
enforcement after receiving comments in response to the NOPR 
identifying such a possibility.
    BWC agreed with DOE that gas-fired circulating water heaters would 
not be direct substitutes for gas-fired instantaneous water heaters, 
indicating that gas-fired circulating water heaters as defined in the 
December 2023 SNOPR are better suited towards providing large volumes 
of hot water in short periods of time and gas-fired instantaneous water 
heaters for lengthier periods of time. (BWC, No. 1413 at p. 3) Rheem 
supported DOE's tentative determination that circulating water heaters 
do not provide the same consumer utility as gas-fired instantaneous 
water heaters. Rheem added that though they do not currently exist on 
the market, the combination of the non-flow-activated operational 
scheme, storage tank or recirculation loop requirement, and input rate 
limits consistent with other storage-type water heaters present in 
DOE's definition ensures that any future gas-fired circulating water 
heaters would not serve as direct replacements for gas-fired 
instantaneous water heaters. (Rheem, No. 1408 at p. 2) A.O. Smith 
agreed with DOE's tentative determination that gas-fired circulating 
water heaters do not provide the same consumer utility as gas-fired 
instantaneous water heaters. (A.O. Smith, No. 1411 at p. 6) CEC noted 
that circulating water heaters provide different utilities from 
instantaneous water heaters and experience thermal standby losses more 
than a typical non-circulating storage water heater due to plumbing 
acting as a storage volume for a significant volume of hot water. (CEC, 
No. 1412 at p. 3) ASAP et al. agreed with DOE's tentative determination 
that gas-fired circulating water heaters do not provide the same 
consumer utility as gas-fired instantaneous water heaters due to the 
fact that gas-fired instantaneous water heaters utilize flow-activated 
control schemes and larger burners (compared to gas-fired circulating 
water heaters) in order to meet demand on a continuous basis, whereas 
gas-fired circulating water heaters must operate with a separate stored 
volume of hot water. (ASAP et al., No. 1407 at p. 2)
    Rinnai agreed with DOE that gas-fired circulating water heaters do 
not provide the same utility as gas-fired instantaneous water heaters. 
Rinnai also stated that gas-fired circulating water heaters do not 
provide consumers with the same features, energy efficiency and reduced 
emissions benefits as gas-fired instantaneous water heaters at the 
proposed UEF levels. Rinnai reiterated its comments made in response to 
the July 2023 NOPR that UEFs of 0.80 to 0.81 result in increased energy 
savings and reduction of CO2 emissions in comparison with 
the levels gas-fired circulating water heaters would be subject to as 
gas-fired storage water heaters. Thus, Rinnai arrived at a different 
conclusion from DOE and claimed that there is not a sufficient basis 
for allowing gas-fired circulating water heaters to be held to a lower 
UEF standard than other consumer products and requested that DOE 
instead establish the more stringent standards proposed in the July 
2023 NOPR. (Rinnai, No. 1415 at pp. 1-2)
    As discussed in section IV.A.1.c of this document, DOE has found 
sufficient justification in accordance with the provisions of EPCA to 
establish separate standards for storage-type and instantaneous-type 
water heaters.
    Rheem, however, noted an additional concern that circulating water 
heaters can be paired with any size storage tank in the field, and that 
there is still a concern that circulating water heaters certified to a 
lower capacity energy conservation standard would be installed with 
higher capacity storage tanks where higher energy conservation 
standards would be required. Because of this, Rheem recommended DOE 
establish separate energy conservation standards for circulating water 
heaters, but at levels consistent with the higher capacity energy 
conservation standards. In its recommendation, Rheem showed that the 
standards equations for larger storage-type product classes (i.e., gas-
fired storage water heaters 55-100 gallons, and electric storage water 
heaters 55-120 gallons) would apply to both circulating water heaters 
and their analogous traditional storage-type water heaters. (Rheem, No. 
1408 at pp. 2-3)
    DOE understands Rheem to be suggesting that, in the case that a 
circulating water heater is designed and marketed to be paired with 
multiple volumes of storage tanks in the field, it is useful for the 
rating to reflect larger storage volumes. However, DOE notes that the 
size of the separate storage tank that the product is tested with (in 
accordance with section 4.10 of the test procedure) results in the 
effective storage volume of the circulating water heater, which, for 
most types of circulating water heaters will be 80 to 120 gallons. This 
already results in circulating water heaters being held to the same 
standards as larger storage water heaters. The only exception to this 
is electric heat pump circulating

[[Page 37810]]

water heaters, which are paired with smaller tanks. Separate storage 
tank pairings are discussed further in section V.D.2 of this document. 
Additionally, the commenter does not provide evidence as to how 
different standards for circulating water heaters would be justified 
under the provisions of EPCA.
    After reviewing these comments DOE has concluded that circulating 
water heaters do not have any characteristics which justify separate 
standards under the provisions of EPCA at 42 U.S.C. 6295(q)(1). DOE has 
determined not to create separate product classes for circulating water 
heaters.
    To accomplish this, in the December 2023 SNOPR DOE had proposed an 
addition to the definition that stated, ``Paired with a separate 
storage tank, a circulating water heater constitutes a storage-type 
water heater.'' 88 FR 89330, 89335.
    Multiple stakeholders raised concern that DOE's proposed revised 
definition for ``circulating water heater'' seemingly implies that 
circulating water heaters are only storage-type water heaters if they 
are paired with a separate storage tank. These commenters--NEEA, ASAP 
et al., the CA IOUs, CEC, A.O. Smith and NYSERDA--all indicated that 
circulating water heaters paired with a circulating loop also 
constitute storage-type water heaters. (NEEA, No. 1414 at p. 3; ASAP et 
al., No. 1407 at p. 2; CA IOUs, No. 1409 at pp. 1-2; CEC, No. 1412 at 
p. 2; A.O. Smith, No. 1411 at pp. 4-5; NYSERDA, No. 1406 at p. 2)
    NEEA requested that DOE define circulating water heaters as 
constituting storage-type water heaters regardless of the configuration 
in which they are sold or installed. (NEEA, No. 1414 at p. 3) ASAP et 
al. encouraged DOE to clarify the proposed definition for circulating 
water heaters so that it is clear all circulating water heaters, 
whether paired with a separate storage tank or recirculation loop, 
would be considered storage-type water heaters. (ASAP et al., No. 1407 
at p. 2)
    The CA IOUs also stated that excluding mention of circulation loops 
would be inconsistent with the earlier definitional requirements 
indicating that they must be paired with either a separate storage tank 
or a water circulation loop and recommend that DOE modify the 
definition as ``Paired with a separate storage tank or circulation 
loop, a circulating water heater constitutes a storage-type water 
heater.'' (CA IOUs, No. 1409 at pp. 1-2)
    CEC provided similar statements, adding that the exclusion of 
pairings with water circulation loops may become a loophole exploited 
by manufacturers. CEC recommended that DOE modify the definition to 
simply state that ``a circulating water heater constitutes a storage-
type water heater'' to avoid potential misreading. (CEC, No. 1412 at p. 
2)
    A.O. Smith recommended DOE remove the phrase ``paired with'' from 
the statement ``paired with a separate storage tank a circulating water 
heater constitutes a storage-type water heater'' in the definition for 
circulating water heater to avoid implying that only circulating water 
heaters that come with a manufacturer-specified or supplied tank would 
be considered circulating water heaters. In place of this phrasing, 
A.O. Smith suggested DOE incorporate the definition for a ``water 
heater requiring a storage tank'' currently outlined in section 1.9 of 
appendix E to subpart B into Sec.  430.2 and reference this definition 
in the circulating water heater definition to ensure clarity. A.O. 
Smith commented that, given the input capacity limits placed on 
circulating water heaters in their respective definitions, a 
recirculation loop without the use of a storage tank is unlikely to be 
an applicable configuration in the residential context. Therefore, A.O. 
Smith recommended DOE remove the term ``either'' and the phrase ``or 
water recirculation loop'' from the circulating water heater definition 
proposed in the December 2023 SNOPR. (A.O. Smith, No. 1411 at pp. 4-5)
    NYSERDA recommended that DOE update the definition for circulating 
water heater to read as follows: ``When paired with a separate storage 
tank or as part of a water circulation loop, a circulating water heater 
constitutes a storage-type water heater''. (NYSERDA, No. 1406 at p. 2)
    In response to these requests for further clarification, DOE agrees 
with most commenters that circulating water heaters would constitute 
storage water heaters whether they are paired with a tank or a 
recirculation loop. The loop serves to store hot water in pipes instead 
of in a tank. In both cases, the product does not function properly 
unless the hot water can be maintained outside of the water heater 
prior to delivery at a fixture.
    While A.O. Smith suggested that a circulating water heater be 
defined as a ``water heater requiring a storage tank,'' this is not 
necessarily reflective of field usage to the extent that it can be used 
to define the product at 10 CFR 430.2. Numerous other comments indicate 
that a circulating water heater can also function with a recirculation 
loop. DOE has found examples of gas-fired instantaneous water heaters 
with input rates that modulate as low as 15,000 Btu/h and can be 
outfitted with recirculation loops in residential homes. While these 
specific products are not circulating water heaters because they have 
flow-activated control schemes and do not explicitly require a separate 
volume of stored hot water to function, they do demonstrate that it is 
possible for gas-fired products with input rates lower than 75,000 Btu/
h to be used in conjunction with a recirculation loop and no tank.
    Circulating water heaters are treated as ``water heaters requiring 
a storage tank'' in appendix E for the purpose of conducting the test 
procedure because they are not sold with a tank. The appendix E test 
procedure refers to ``water heaters requiring a storage tank'' in 
section 1.19 order to provide instruction on how to set up such a water 
heater with a representative volume of stored water. Therefore, DOE is 
not amending 10 CFR 430.2 to define a ``water heater requiring a 
storage tank'' because this terminology has limited application to the 
test setup instructions in appendix E only. DOE is also not 
incorporating this terminology in the definition of ``circulating water 
heater'' so as not to contradict how these products can be designed, 
marketed, and used in the field.
    After considering the suggestions provided by interested parties, 
DOE is amending the definition of ``circulating water heater'' at 10 
CFR 430.2 to read as:
    Circulating water heater means a 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 to circulate water 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 circulating water heater 
constitutes a storage-type water heater.
    The December 2023 SNOPR had also proposed to amend the definitions 
of the three different fuel types of circulating water heater to align 
with the re-classification of these products as storage water heaters. 
88 FR 89330, 89339.
    CA IOUs stated that specifying the volume of stored water per 4,000 
Btu/h of input in these definitions is unnecessary because circulating 
water

[[Page 37811]]

heaters are already defined as storage-type water heaters and 
recommended that DOE remove this requirement from the definitions of 
electric, gas-fired and oil-fired circulating water heaters as proposed 
in the December 2023 SNOPR. (CA IOUs, No. 1409 at p. 2)
    DOE also agrees with the CA IOUs' suggestion to revise the 
definitions for the different types of circulating water heaters. As 
discussed in section III.B, these additional definitions serve mainly 
to clarify the input rate cutoffs to distinguish these products from 
commercial water heaters. DOE is amending these definitions to read as:
    Electric circulating water heater means a circulating water heater 
with an input of 12 kW or less (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 75,000 Btu/h or less.
    Oil-fired circulating water heater means a circulating water heater 
with a nominal input of 105,000 Btu/h or less.
    In the December 2023 SNOPR DOE requested comment on what the 
implications to industry might be if circulating water heaters were to 
be treated as storage water heaters. 88 FR 89330, 89335. In response, 
several commenters agreed that DOE's analysis for amended standards of 
storage-type water heaters is still representative if circulating water 
heaters are included in these product classes.
    CEC agreed with DOE that the definition of circulating water heater 
as proposed in the December 2023 SNOPR would not change the results of 
the life-cycle cost, national impact, and other downstream analyses, 
stating that the proposed changes would not cause DOE's analysis to 
become unrepresentative and agreeing that no additional analysis is 
necessary. (CEC, No. 1412 at p. 2) The CA IOUs stated that there are 
few to no shipments of consumer water heaters meeting the definition of 
``circulating water heater'' as proposed in the December 2023 SNOPR. CA 
IOUs stated that DOE may therefore maintain its July 2023 NOPR analyses 
with respect to storage-type water heaters and apply the associated 
proposed standards to circulating water heaters. (CA IOUs, No. 1409 at 
p. 1) NYSERDA and ASAP et al. stated their agreement with DOE's 
assessment that, because DOE has not identified consumer water heaters 
on the U.S. market that qualify as circulating water heaters, 
analytical results from the July 2023 NOPR remain representative and do 
not need to be updated due to changes proposed in the December 2023 
SNOPR. (NYSERDA, No. 1406 at p. 2; ASAP et al., No. 1407 at p. 3) ASAP 
et al. added that, if introduced, circulating water heaters would 
likely have similar cost and usage characteristics to existing storage-
type consumer water heaters. (ASAP et al., No. 1407 at p. 3)
    Rinnai, however, requested that DOE clarify the justification for 
amending the definition of products that do not currently exist on the 
market. (Rinnai, No. 1415 at p. 1) BWC agreed with DOE that circulating 
water heaters as defined in the June 2023 TP Final Rule are not 
deployed in residential applications. (BWC, No. 1413 at p. 1) BWC 
agreed with DOE that there are no consumer products that meet the 
definition of ``circulating water heater'' as proposed in the December 
2023 SNOPR and requested that DOE clarify how it determined that these 
products would have similar cost and use profiles as storage-type water 
heaters. (BWC, No. 1413 at p. 2)
    In the December 2023 SNOPR the Department had erroneously stated 
that there are no longer heat pump circulating water heaters available 
on the market (see 88 FR 89330, 89333) due to changes in a 
manufacturer's website. Product literature for these models exists and 
has been added to the docket for this rulemaking. In addition to 
stakeholder comments, this literature demonstrates the use of these 
products in a manner similar to storage-type water heaters. Shipments 
of these products, though they are fewer than those of traditional 
storage-type water heaters, are not zero. These products are included 
in historical data on heat pump water heater shipments as they would 
meet efficiency level 1 for small electric storage water heaters. Hence 
DOE's analysis does include circulating heat pump water heaters as 
storage-type water heaters.
b. Low-Temperature Water Heaters
    As stated previously in section III.B of this document, in the June 
2023 TP Final Rule, DOE established the following definition for ``low-
temperature water heater'' in 10 CFR 430.2:
    ``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.
    DOE also established test procedures to determine the UEF of these 
types of water heaters. 88 FR 40406. Regarding low-temperature water 
heaters, DOE notes that they are covered as electric instantaneous 
water heaters. As discussed in section IV.C of this document, DOE is 
not considering updated standards for electric instantaneous water 
heaters in this rulemaking because it was unable to determine 
technologies associated with increased efficiencies in these products. 
Therefore, although low-temperature water heaters are tested in a 
slightly different manner from other electric instantaneous water 
heaters, DOE is maintaining low-temperature water heaters within the 
broader electric instantaneous water heater product class as proposed 
in the July 2023 NOPR and is not establishing a separate class for 
them.
c. 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 
heater product classes should be combined. (See section 2.3 of the 
preliminary TSD.)
    In response to the March 2022 Preliminary Analysis, DOE received 
comments indicating that storage and instantaneous product classes 
should not be combined because each type of product provides unique 
utility to consumers and combining their product classes would lead to 
UEF standards that are not technologically feasible. DOE tentatively 
agreed with these comments, which were addressed in the July 2023 NOPR, 
and maintained separate product classes for storage and instantaneous 
water heaters for its analyses and proposed standards. 88 FR 49058, 
49078.
    In response to the July 2023 NOPR, BWC agreed with DOE's tentative 
determination to maintain separate product classes for instantaneous-
type and storage-type water heaters because they offer distinct 
utilities to consumers in both their designs and capabilities. (BWC, 
No. 1164 at p. 14) Rheem also agreed with DOE's tentative determination 
to maintain separate product classes for storage-type and 
instantaneous-type water heaters given that these water heaters have 
different

[[Page 37812]]

utilities and operational characteristics which necessitate separate 
consideration. (Rheem, No. 1177 at p. 11) However, Rheem noted that the 
proposed standards for electric instantaneous water heaters with 2 or 
more gallons of rated storage volume are significantly higher than the 
standards proposed for very small electric storage water heaters 
despite these products all having similar under-sink or commercial 
applications. (Rheem, No. 1177 at pp. 13-14) Rheem also requested 
clarification on whether rated or effective storage volume should be 
used when determining the storage-type and instantaneous-type water 
heater classification. (Rheem, No. 1177 at p. 2)
    NEEA stated that, while it does not disagree with DOE's conclusion 
to create separate standards for gas-fired storage and gas-fired 
instantaneous water heaters, standby energy losses should not be 
considered in a determination of product class as they do not 
constitute a performance-related feature. NEEA noted that in DOE's 
decision to set separate product classes for storage and tankless water 
heaters, DOE stated that ``storage water heaters have associated 
standby energy losses that instantaneous water heaters do not.'' (NEEA, 
No. 1199 at p. 10)
    AWHI, however, urged DOE to investigate combining gas-fired 
instantaneous and gas-fired storage water heater categories in a future 
rulemaking such that the same minimum UEF requirements would apply to 
both product classes. (AWHI, No. 1036 at pp. 3-4)
    After reviewing the comments received on the July 2023 NOPR, DOE 
has determined that different product classes and standards for storage 
and instantaneous water heaters remain necessary at this time, and DOE 
is not combining them in this rulemaking. As stated in the July 2023 
NOPR, 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. 88 FR 49058, 
49078. These products are, therefore, designed differently to suit 
these different needs. As a result of the design differences (i.e., the 
storage of hot water in storage-type water heaters), storage-type water 
heaters incur standby losses to the surrounding ambient air.
    In response to Rheem, DOE notes that although electric 
instantaneous water heaters with 2 or more gallons of rated storage 
volume and very small electric storage water heaters may be used for 
many of the same under-sink-type applications, each still offers 
distinct utility to the consumer. Per their definitions at 10 CFR 
430.2, electric instantaneous water heaters will necessarily have a 
higher input rate to volume ratio, and thus will be capable of 
operating on a more continuous basis than very small electric storage 
water heaters within the flow rate expectations of these applications. 
DOE expects these products to have design differences because the scope 
of coverage is limited to products with electric input rates no greater 
than 12 kW (see section III.B of this document); therefore, electric 
instantaneous water heaters cannot contain more than approximately 10 
gallons of hot water,\31\ whereas very small electric storage water 
heaters can contain up to 20 gallons.
---------------------------------------------------------------------------

    \31\ 12 kW is approximately 41,000 Btu/h. Instantaneous-type 
water heaters contain no more than one gallon of water per 4,000 
Btu/h of input, resulting in a maximum of about 10 gallons for an 
electric instantaneous water heater with 12 kW of input.
---------------------------------------------------------------------------

    In response to NEEA, DOE does not consider standby losses to be a 
performance-related feature; rather, the performance-related features 
are as previously described and the standby losses create the 
difference in energy consumption between storage-type and 
instantaneous-type water heaters that justifies different standard 
levels for the two types of products. In accordance with 42 U.S.C. 
6295(q), DOE has concluded that separate standards for storage-type and 
instantaneous-type water heaters are justified not only because these 
types offer distinct utilities to the consumer, but also because the 
design necessary to provide this utility (i.e., a stored volume of 
water for storage-type water heaters) affects the UEF rating.
    EPCA defines instantaneous-type water heaters as units which heat 
water but contain no more than one gallon of water per 4,000 Btu per 
hour of input. (42 U.S.C. 6291(27)(B)) Based on the specific use of the 
term ``contain,'' the rated storage volume, which reflects the amount 
of water that can be contained, should be used when determining the 
storage-type and instantaneous-type water heater classification. For 
circulating water heaters, which operate in a system that contains a 
stored volume of hot water, this is the rated storage volume of the 
separate storage tank (see section IV.A.1.a of this document).
d. Gas-Fired Water Heaters
    Gas-fired water heaters operate by burning fuel to generate heat, 
which is then transferred from the products of combustion (i.e., flue 
gases) to the water using a heat exchanger before the flue gases are 
expelled through venting to the outside. Regardless of efficiency, gas-
fired water heaters operate in the same manner, by transferring heat to 
potable water for use within residences. Any combustion heat not 
transferred to the water is lost to the environment as waste heat, 
primarily through the exhaust venting. The difference between high-
efficiency water heaters and low-efficiency water heaters is the amount 
of heat that is lost to the environment. Condensing gas-fired water 
heaters are able to transfer more heat from the flue gases to the 
water, which results in less heat being lost to the environment. As a 
result, flue gases exhausted from a condensing gas-fired water heater 
are typically less than 130 [deg]F, while flue gases exhausted to the 
environment from a non-condensing gas-fired storage water heater may be 
in the 300-400 [deg]F range or even higher. Condensing gas-fired water 
heaters are able to extract more heat due to improved heat exchanger 
designs.
    For example, A.O. Smith notes that their high-efficiency condensing 
gas storage water heaters ``are built similarly to standard [non-
condensing] gas tank water heaters with some modifications for higher 
efficiency and performance.'' \32\ More specifically, A.O. Smith notes 
that their condensing models ``are built with [a] helical internal heat 
exchanger that keeps combustion gasses in the tank longer to transfer 
more heat into the water, increasing efficiency and reducing operating 
cost.'' \33\
---------------------------------------------------------------------------

    \32\ See A.O. Smith's Info Center on Gas Tank High Efficiency 
Water Heaters, available at www.hotwater.com/info-center/gas-water-heaters/gas-tank-high-efficiency.html (last accessed Apr. 3, 2024).
    \33\ Id.
---------------------------------------------------------------------------

    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. Throughout this rulemaking, some 
commenters have urged DOE to reconsider the conclusions reached in the 
December 2021 Venting Interpretive Final Rule, and in the July 2023 
NOPR, DOE considered these comments but

[[Page 37813]]

again concluded that heat exchanger technology and venting do not 
constitute any of the characteristics upon which DOE has the authority 
to establish separate product classes under EPCA. 88 FR 49058, 49079.
i. General Comments
    Earthjustice supported DOE's tentative determination in the NOPR 
that separate product classes for condensing and non-condensing 
products are not warranted, and stated that this is consistent with 
DOE's determinations in the December 2021 Venting Interpretive Rule. 
(Earthjustice, No. 1189 at pp. 2-3)
    In response to comments that DOE should establish separate product 
classes for condensing and non-condensing gas-fired water heaters, DOE 
notes that when evaluating and establishing energy conservation 
standards, DOE is required to establish product classes based on: (1) 
the type of energy used; and (2) capacity or other performance-related 
feature which other products within such type (or class) do not have 
and that DOE determines justify a different standard. In making a 
determination of whether a performance-related feature justifies a 
different standard, DOE must consider factors such as the utility to 
the consumer of the feature and other factors DOE determines are 
appropriate. (42 U.S.C. 6295(q))
ii. Performance-Related Feature Under 42 U.S.C. 6295(q)(1)(B)
    DOE received several comments on whether non-condensing technology 
should be considered a performance-related feature for the purpose of 
establishing a separate product class under 42 U.S.C. 6295(q). For 
example, Rinnai stated that, pursuant to section 6295(q) of EPCA, DOE 
is required to issue higher or lower energy conservation standards for 
non-condensing and condensing gas-fired instantaneous water heaters 
because the products have distinct capacities and performance-related 
features that provide consumer utility and justify separate standards. 
(Rinnai, No. 1186 at p. 15) Rinnai asserted that DOE's finding in the 
July 2023 NOPR that non-condensing technology does not constitute a 
performance-related feature as prescribed by EPCA at 42 U.S.C. 
6295(q)(1) exceeds DOE's authority because it errs in limiting the 
analysis to non-condensing technology, ignoring features associated 
with non-condensing technology such as ease of installation and reduced 
installation cost, and because it interprets ``utility'' too narrowly 
by only considering the impact the technology has on consumer's 
operation of or interaction with the appliance. (Rinnai, No. 1186 at 
pp. 12-14) Similarly, TPPF commented that DOE should set a separate 
standard for condensing water heaters because, according to TPPF, a 
non-condensing water heater serves a separate consumer utility because 
it is more compact, easier to install, and requires less maintenance. 
TPPF asserted that the consumer utility of a design is not limited to 
that which is accessible to the layperson or based upon the consumer's 
operation of or interaction with the product, even the ease of 
installation of a non-condensing gas-fired instantaneous water heater 
should be considered a consumer utility. (TPPF, No. 1153 at pp. 3-4)
    ONE Gas asserted that minimizing installed cost is a distinct 
product utility. (ONE Gas, No. 1200 at p. 5) ONE Gas asserted that the 
availability of products that can serve as a ``drop-in'' replacement 
for consumers who already have non-condensing products without 
modifications to the installation space is a consumer utility. ONE Gas 
also asserted that the ability of ``drop-in'' replacements to restore 
water heating ability without delays associated with switching to other 
products is a consumer utility. (ONE Gas, No. 1200 at p. 5) ONE Gas 
stated that the December 2021 Venting Interpretive Final Rule did not 
consider the technical and economic burdens of installation when it 
concluded that product classes based on combustion system types (i.e., 
non-condensing and condensing) did not provide distinct customer 
utility among combustion appliances. (ONE Gas, No. 1200 at p. 6) ONE 
Gas reiterated its comments that DOE's determination that condensing/
non-condensing combustion and power/atmospheric venting do not provide 
unique customer utility is unreasonable and that DOE is required to 
separately consider minimum energy standards for ``covered products 
that [have] two or more subcategories'' under EPCA at 42 U.S.C. 
6295(q)(1). (ONE Gas, No. 1200 at p. 8)
    With respect to commenters' statements that venting associated with 
non-condensing technology itself is a performance-related feature that 
justifies a separate product class, DOE first notes that venting, like 
a gas burner or heat exchanger, is one of the basic components found in 
every gas-fired water heater (whether condensing or noncondensing). As 
such, assuming venting is a performance-related feature, it is a 
feature that all gas-fired water heaters possess. As a result, it 
cannot be the basis for a product class. See 42 U.S.C. 6295(q)(1)(B). 
Thus, in order to meet the product class requirements in 42 U.S.C. 
6295(q)(1)(B), these commenters are requesting DOE determine that a 
specific type of venting is a capacity or other performance-related 
feature.
    A specific venting technology--including non-condensing venting--is 
not a ``capacity or other performance related feature'' under 42 U.S.C. 
6295(q)((1)(B). As discussed in the December 2021 final interpretive 
rule, DOE has concluded that performance-related features are those 
that a consumer would be aware of and would recognize as providing 
additional benefits during operation of the covered product or 
equipment. 86 FR 73947, 73955.
    DOE also notes that almost every component of a covered product 
could be broken down further by any of a number of factors. For 
example, heat exchangers, which are used in a variety of covered 
products, could be divided further by geometry or material; 
refrigerator compressors could be further divided by single-speed or 
variable-speed; and air-conditioning refrigerants could be further 
divided by global warming potential. As a general matter, energy 
conservation standards save energy by removing the least-efficient 
technologies and designs from the market. For example, DOE set energy 
conservation standards for furnace fans at a level that effectively 
eliminated permanent split capacitor (PSC) motors from several product 
classes, but which could be met by brushless permanent magnet (BPM) 
motors, which are more efficient. 79 FR 38130 (July 3, 2014). As 
another example, DOE set energy conservation standards for microwave 
oven standby mode and off mode at a level that effectively eliminated 
the use of linear power supplies, but which could be met by switch-mode 
power supplies, which exhibit significantly lower standby mode and off 
mode power consumption. 78 FR 36316 (June 17, 2013). The energy-saving 
purposes of EPCA would be completely frustrated if DOE were required to 
set standards that maintain less-energy-efficient covered products and 
equipment in the market based simply on the fact that they use a 
specific type of less efficient heat exchanger, motor, power supply, 
etc.
    In this rule and many others, DOE has considered whether the 
purported ``feature'' provides additional performance benefits to the 
consumer during operation. Using the previous example of furnace fan 
motors, if an interested person had wanted to preserve furnace fans 
with PSC motors in the market, they would have had to

[[Page 37814]]

show that furnace fans with PSC motors offered some additional 
performance benefit during operation as compared to furnace fans with 
BPM motors. Refrigerator-freezers, on the other hand, are an example of 
where DOE determined that a specific type of performance-related 
feature offered additional performance benefit during operation. Some 
refrigerator-freezers have automatic icemakers. Additionally, some 
automatic icemakers offer through-the-door ice service, which provides 
consumers with an additional benefit during operation. As such, DOE 
further divided refrigerator-freezers into product classes based on the 
specific type of automatic icemaker (i.e., whether the automatic 
icemaker offers through-the-door ice service). See 10 CFR 430.32(a).
    After reviewing comments from stakeholders provided in this 
rulemaking, DOE has concluded that commenters have not pointed to any 
additional performance benefits during operation offered by non-
condensing water heaters that use non-condensing venting as compared to 
water heaters that use other types of venting. Instead, these 
commenters generally cite compatibility with existing venting (i.e., 
convenience of installation) and other economic considerations as 
reasons why non-condensing venting should be considered a performance-
related feature for the purposes of EPCA's unavailability provision. To 
be sure, DOE considers installation costs in determining whether a 
standard is economically justified. The costs of installing condensing 
venting may, in certain installations, be substantial, and DOE accounts 
for such costs in its analysis. See section IV.F.2 of this document. 
But such installation costs are not a ``capacity or other performance-
related feature'' for purposes of section 6295(q).
    DOE has determined, based on its own research as well as 
information presented in stakeholder comments, that differences in cost 
or complexity of installation between different methods of venting 
(e.g., a condensing water heater versus a non-condensing water heater) 
do not make specific methods of venting a performance-related feature 
under 42 U.S.C. 6295(o)(4), so as to justify separating the products/
equipment into different product/equipment classes under 42 U.S.C. 
6295(q)(1). 86 FR 73947, 73951 (Dec. 29, 2021).
iii. Whether Stakeholders Have Shown by a Preponderance of Evidence 
That Standards Would Result in Unavailability
    DOE received public comments in reference to the ``unavailability 
provision'' found in EPCA, 42 U.S.C. 6295(o)(4), contending that if the 
proposed amended standard for GIWH were adopted, it would eliminate 
non-condensing GIWH from the market. DOE is not summarizing or 
responding to these comments in this notice, as DOE continues to 
consider these comments in informing DOE's decision on amended energy 
conservation standards for GIWH.
iv. Proper Treatment of Economic Considerations
    According to NPGA, APGA, AGA, and Rinnai, the proposed UEF 
requirements for gas-fired storage water heaters would require new 
venting requirements and other additional equipment even if the adopted 
standards did not require condensing gas-fired storage water heaters. 
Based on these proposed UEF requirements, NPGA, APGA, AGA, and Rinnai 
asserted that DOE failed to understand the market for water heaters and 
what differentiates consumer decisions, apparent in its discussion of 
product classes in the July 2023 NOPR. NPGA, APGA, AGA, and Rinnai 
further asserted that DOE's failure to separate product classes based 
on relevant features preferred by consumers shows a fundamental market 
misunderstanding, questioning DOE's capacity to regulate the market. 
According to NPGA, APGA, and Rinnai, DOE continues to strain to show 
that the consumer gains no utility from features associated with 
condensing and non-condensing products, insisting that the design and 
operation of the unit ``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;'' however, these 
commenters stated, these design and installation issues are certainly 
accessible to the consumer when choosing the appliance. (NPGA, APGA, 
AGA, and Rinnai, No. 441 at pp. 2-3)
    NPGA, APGA, AGA, Rinnai, and TPPF commented that DOE does not 
capture what differentiates consumer decisions to purchase non-
condensing over condensing water heaters. DOE recognizes, however, that 
purchase price, installation cost, and maintenance cost--factors which 
some commenters suggested could be ``features'' of non-condensing 
models that lead some consumer to pick these models over condensing 
models--are relevant to consumer decision-making. Accordingly, DOE has 
treated those variables as inputs to evaluate the costs and benefits to 
consumers of standards requiring differing technologies. But as stated 
previously, those factors, while relevant to consumer decision-making 
and DOE's standard setting, are not ``features'' for purpose of 
sections 6295(o)(4) or (q)(1)(B). As stated in the December 2021 
Venting Interpretive Final Rule, the ``features'' DOE considers 
separately pertain to those aspects of the appliance with which the 
consumer interacts during the operation of the product (i.e., when the 
product is providing its ``useful output'') and the utility derived 
from those features during normal operation. 86 FR 73947, 73955. The 
installation and purchase decision factors mentioned by commenters do 
not affect the performance of the water heater and how a consumer uses 
it, but instead impact the cost of owning and operating one.
    Because DOE views the issues discussed here to be matters of cost, 
the Department finds it appropriate under the statute to address these 
issues through the rulemaking's economic analysis. 86 FR 73947, 73951 
(Dec. 29, 2021). This interpretation is consistent with EPCA's 
requirement for a separate analysis of economic justification for the 
adoption of any new or amended energy conservation standard (see 42 
U.S.C. 6295(o)(2)-(3); 42 U.S.C. 6313(a)(6)(A)-(C); 42 U.S.C. 6316(a)). 
These costs are addressed in the LCC in section IV.F of this document.
v. Comparison to Ventless Clothes Dryers
    Rinnai noted that, in the case of ventless clothes dryers, DOE 
recognized consumer costs associated with venting as a basis for 
establishing separate product classes. (Rinnai, No. 1186 at p. 11)
    In response to Rinnai's discussion of ventless clothes dryers, DOE 
notes that venting in the case of clothes dryers is different from 
venting of gas-fired appliances, where combustion gases must be 
exhausted outside of the home, and these differences are outlined in 
the December 2021 Venting Interpretative Final Rule.
    Venting for clothes dryers refers to the method of removal of 
evaporated moisture from the cabinet space. Vented clothes dryers 
exhaust this evaporated moisture from the cabinet outside of the home 
whereas ventless clothes dryers instead use a closed-loop system with 
an internal condenser to remove the evaporated moisture from the heated 
air.

[[Page 37815]]

In the TSD accompanying a 2011 direct final rule pertaining to 
residential clothes dryers, DOE explained that ventless clothes dryers 
can be installed where vented dryers would be precluded due to 
restrictions preventing any sort of vent from being installed, and thus 
the Department noted that how a clothes dryer is vented is not simply 
an issue of initial costs or a consumer choosing one product over 
another.\34\ As discussed in the December 2021 Venting Interpretive 
Final Rule, unlike consumers of ventless dryers, consumers facing the 
prospect of replacing a non-condensing water heater with a condensing 
water heater do have options available to either modify existing 
venting or install a new venting system to accommodate a condensing 
product, or to install a feasible alternative to have heated air or 
water provided (i.e., an electric appliance); but in all cases, the 
consumer would not be precluded from having access to heated water, a 
result which is distinctly different from the one at issue in the 
ventless clothes dryers example. 86 FR 73947, 73957. Condensing gas-
fired water heaters can still be installed in buildings where non-
condensing gas-fired water heaters currently are. This is because, 
unlike the case of clothes dryers, both non-condensing and condensing 
gas-fired water heaters use a vent--the difference in installation is 
in the type of venting material and its cost.
---------------------------------------------------------------------------

    \34\ Technical Support Document: Energy Efficiency Program for 
Consumer Products and Commercial and Industrial Equipment: 
Residential Clothes Dryers and Room Air Conditioners, pp. 3-6 
(Available at: www.regulations.gov/document?D=EERE-2007-BT-STD-0010-0053).
---------------------------------------------------------------------------

vi. Conclusion
    For the reasons discussed in this section and in the December 2021 
Final Interpretive Rule, DOE continues to find that there is no basis 
for altering the Department's approach regarding the establishment of 
product classes for gas-fired water heaters for this rulemaking.
e. Very Large Gas-Fired Storage Water Heaters
    A.O. Smith identified that a product class for > 100 gallon gas-
fired storage water heaters with a non-condensing efficiency level is 
likely to incentivize the circumvention of current condensing standards 
for 55-100 gallon gas-fired storage water heaters and residential-duty 
commercial gas-fired storage water heaters. (A.O. Smith, No. 1182 at p. 
14) NYSERDA commented that a non-condensing-level standard for gas-
fired storage water heaters > 100 gallons would result in market 
confusion and the possibility of circumventing residential-duty 
commercial water heater standards, because residential-duty commercial 
gas-fired storage water heaters may typically only be just over the 
75,000 Btu/h input rate limit and could easily be converted to consumer 
water heaters. (NYSERDA, No. 1192 at p. 6)
    DOE notes that the non-condensing level for >100 gallon gas-fired 
storage water heaters is simply a crosswalk of existing standards, and, 
as discussed in section IV.C.2 of this document, DOE did not evaluate 
more stringent standards for this product class in this rulemaking.
    However, DOE understands the concerns from these stakeholders and 
may consider evaluating amended standards for these product classes in 
a future rulemaking.
f. Electric Storage Water Heaters
    In response to the March 2022 Preliminary Analysis, DOE received 
comments requesting that DOE establish separate product classes for 
heat pump electric storage water heaters and electric resistance 
storage water heaters, citing concern with expanding heat pump-level 
standards for electric storage water heaters. DOE responded to these 
comments in the July 2023 NOPR, tentatively determining that the 
conclusions reached in the April 2010 Final Rule that separate classes 
are not justified (see 75 FR 20112, 20135) remain valid and that heat 
pump electric storage water heaters and electric resistance storage 
water heaters do not warrant separate product classes as they do not 
exhibit any unique performance-related features. 88 FR 49058, 49079-
49080.
    In response to the July 2023 NOPR, DOE received additional comments 
regarding the creation of separate product classes for heat pump 
electric storage water heaters and electric resistance storage water 
heaters. EEI asserted that DOE should create separate product classes 
or require lower efficiency levels for electric resistance storage 
water heaters rather than maintaining these technologies in the same 
classes with heat pump water heaters, as this would allow newer 
technologies at more economic price points a chance to meaningfully 
compete in the marketplace and would, in turn, support the 
Administration's climate and clean energy goals. EEI stated that the 
proposed standards would cause a significant increase in efficiency for 
existing electric resistance storage water heaters. (EEI, No. 1198 at 
pp. 2-3) Earthjustice, however, stated that separate product classes 
for heat pump and electric resistance storage water heaters are not 
warranted, as the NOPR correctly determines. Earthjustice added, 
specifically, that separate product classes would not be justifiable 
under EPCA because heat pump and electric resistance water heaters 
provide equivalent service to the end-user. (Earthjustice, No. 1189 at 
pp. 1-2)
    DOE agrees with EarthJustice and maintains its longstanding 
position, outlined most recently in the July 2023 NOPR, that separate 
product classes for heat pump and electric resistance water heaters are 
not warranted under EPCA. DOE establishes separate product classes 
based on two criteria: (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))
    Heat pump electric storage water heaters and electric resistance 
water heaters both use electricity as the fuel source. 88 FR 49058, 
49079-49080. They both offer similar delivery capacities, and DOE has 
not identified any unique performance-related features offered by 
either heat pump electric storage water heaters or electric resistance 
storage water heaters. Id. DOE considers performance-related features 
to be those aspects of the appliance with which the consumer interacts 
during operation of the product. 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. Therefore, DOE has 
maintained both heat pump and electric resistance technologies within 
the electric storage water heater classes in this rulemaking analysis, 
consistent with its approach in the April 2010 Final Rule.
i. Configurations of Electric Water Heaters
    In response to the December 2023 SNOPR, A.O. Smith requested 
clarification as to what test procedure provisions apply to electric 
resistance booster water heaters that meet the definition of a ``water 
heater requiring a storage tank'' but not of a ``circulating water 
heater''. A.O. Smith added that the June 2023 TP Final Rule preamble 
seems to indicate that electric resistance booster water heaters are to 
be tested to section 4.10 of appendix E, but that the heading for 
section 4.10 indicates the section is intended for circulating water 
heaters and does not include provisions for electric resistance booster 
water heaters. A.O. Smith commented that electric resistance booster 
water heaters and circulating water heaters both should be considered 
as ``water heater requiring a storage tank'' and

[[Page 37816]]

recommended that the same test procedure apply to both. A.O. Smith 
recommended DOE implement this approach by establishing a definition 
for electric resistance booster water heaters and updating section 4.10 
of appendix E to include provisions for testing electric resistance 
booster water heaters. (A.O. Smith, No. 1411 at p. 6)
    In response to A.O. Smith, DOE notes that this section provides a 
description of electric water heater design examples and how they 
should be tested and classified for the applicable standards. An 
electric instantaneous water heater product that is designed to operate 
in tandem with a storage tank but not circulate the water between 
itself and the tank is not a circulating water heater because it does 
not meet the definitional criteria ``must be used in combination with a 
recirculating pump to circulate water.'' A.O. Smith suggested that this 
type of add-on product might qualify as a ``water heater requiring a 
storage tank'' per section 1.19 of appendix E; however, DOE does not 
find this to necessarily be true. Appendix E defines a ``Water Heater 
Requiring a Storage Tank'' in part as a water heater without a storage 
tank that cannot meet the requirements of sections 2 and 5 of this 
appendix without the use of a storage water heater or unfired hot water 
storage tank. However, section 5.2.2.1 specifies that, for flow-
activated water heaters, if the water heater is not capable of 
providing the discharge temperature specified in section 2.5 of 
appendix E when the flow rate is 1.7 gallons  0.25 gallons 
per minute, then adjust the flow rate as necessary to achieve the 
specified discharge water temperature. Based on these requirements, 
electric resistance booster water heaters would indeed be able to be 
tested in accordance with appendix E without the use of a storage water 
heater or separate storage tank.
    A.O. Smith said that it agreed with DOE's clarifications in the 
December 2023 SNOPR which classify all split-system heat pump water 
heaters, regardless of whether or not they include a tank, as electric 
storage water heaters. (A.O. Smith, No. 1411 at p. 3-4)
    To offer additional clarity on how different electric water heaters 
would be regulated as a result of this final rule, Table IV.4 shows the 
distinguishing characteristics of circulating water heaters, split-
system heat pump water heaters, and other water heaters that operate in 
tandem with a separate tank but are instantaneous-type.
    A split-system heat pump water heater is defined in section 1.13 of 
appendix E and reads, ``Split-system heat pump water heater means a 
heat pump-type water heater in which at least the compressor, which may 
be installed outdoors, is separate from the storage tank'' (therefore, 
a split-system heat pump water heater is supplied with a storage tank). 
These designs are discussed more in the following subsection of this 
document. The definition of a circulating water heater is provided in 
section IV.A.1.a of this document, and the key distinction between a 
heat pump circulating water heater and a split-system heat pump water 
heater is that a circulating water heater is not sold with a tank (but 
must be paired with a tank or other stored volume of water in the field 
to operate), whereas a split system heat pump water heater is sold with 
a tank. Although heat pump circulating water heaters and split system 
heat pump water heaters are functionally very similar when installed in 
the field, they are differentiated in DOE's regulations due to 
differences in the test methods, which are outlined in Table IV.4. The 
definition of a low-temperature water heater is provided in section 
IV.A.1.b of this document, and these units are instantaneous-type (they 
do not include circulating water heaters).
BILLING CODE 6450-01-P

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BILLING CODE 6450-01-C
    The same concepts would apply for any other fuel type (e.g., gas or 
oil).
ii. Plug-In and Split-System Heat Pump Electric Storage Water Heaters
    DOE received comments in response to the March 2022 Preliminary 
Analysis recommending that DOE create a separate product class for 
split-system and plug-in (120-volt) heat pump water heaters. Commenters 
cited their utility in installation scenarios unable to be met by other 
heat pump water heaters. DOE responded to these comments in the July 
2023 NOPR stating that, while plug-in heat pump water heaters were not 
considered in the March 2022 Preliminary Analysis because they were not 
commercially available in the United States at the time, DOE did not 
have enough information to determine whether a higher or lower 
efficiency standard would be justified. DOE also stated that it had not 
identified any unique performance-related features that would warrant a 
separate product class for split-system heat pump water heaters or 
plug-in heat pump water heaters. 88 FR 49058, 49080.
    Responding to the July 2023 NOPR, Rheem supported DOE's tentative 
determination not to assign separate product classes to 120-volt heat 
pump water heaters, noting that its 120-volt design configurations are 
able to meet the proposed standards. Rheem also stated that there is no 
need to amend the test procedure for 120-volt heat pump water heaters 
at this time. (Rheem, No. 1177 at p. 8) A.O. Smith, however, 
recommended that DOE separate 120-volt heat pump water heaters into 
their own product class and align the efficiency levels for this 
product class to ENERGY STAR[supreg] Version 5.0. A.O. Smith added that 
120-volt heat pump water heaters are relatively new designs and are 
limited in capacity due to the absence of backup electric resistance 
elements (because the product must operate at a lower voltage of 120 
volts as opposed to conventional 240-volt products). To ensure consumer 
satisfaction, A.O. Smith stated, these products will tend to favor 
maintaining higher FHRs at the detriment of UEF. (A.O. Smith, No. 1182, 
pp. 15-16)
    BWC also supported DOE's tentative determination not to create a 
separate product class for 120-volt heat pump water heaters. BWC stated 
it does not believe that otherwise identical electric products 
differentiated only by their operating voltage meet the criteria for 
establishing separate product classes; the commenter asserted that the 
voltage

[[Page 37819]]

of the product does not cause the consumer to interact with the product 
differently; not does it enhance the utility being provided directly to 
the consumer by the product. (BWC, No. 1164 at p. 14)
    Based on its review of the few models of 120-volt heat pump water 
heaters that have been released at the time of this final rule, DOE 
agrees with BWC in that it has not identified any unique consumer 
utility provided by the 120-volt plug-in configuration. As discussed in 
the assessment of benefits and burdens of each TSL (section V.C.1 of 
this document), DOE has determined that the amended standards adopted 
in this final rule will not significantly inhibit the future 
development of 120-volt heat pump water heaters. Further details of 
120-volt heat pump water heaters are provided in DOE's market and 
technology assessment in chapter 3 of the final rule TSD.
    In addition to 120-volt plug-in heat pump water heaters, split-
system heat pump water heaters are another possible configuration of 
electric storage water heater.
    A.O. Smith stated that commercially available split-system heat 
pump water heaters fall under two main categories: refrigerant-split 
systems (for electric storage water heaters) and water-split or 
``monoblock'' systems (for electric circulating water heaters). (A.O. 
Smith, No. 1182 at p. 16)
    As discussed in section IV.A.1.a of this document, DOE has 
determined that circulating water heaters are a configuration of 
storage-type water heater. Therefore, refrigerant-split systems and 
water-split systems must meet the same the standards adopted under this 
final rule. As was tentatively determined in the July 2023 NOPR, DOE 
has determined not to create a separate product class for split-system 
heat pump 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.
    In the December 2023 SNOPR DOE explained that treating circulating 
water heaters as storage water heaters was parallel to how split-system 
heat pump water heaters are treated: a heat pump module and a separate 
storage tank, which, altogether, are treated as a storage-type water 
heater. 88 FR 89330, 89333. Specifically, DOE wrote that these products 
``have long been considered to be electric storage water heaters.'' Id.
    Pickering noted that while most air-to-water heat pumps are 
electric, systems using natural gas or propane as the fuel source are 
emerging. Pickering added that the emergence of such technologies is 
not in agreement with DOE's statement that heat pump water heaters 
``have long been considered to be electric storage water heaters''. 
(Pickering, No. 1399 at p. 2)
    DOE agrees with Pickering that the statement in the December 2023 
SNOPR implicitly was only referring to electric heat pumps. Split-
system heat pump water heaters that do not rely on electricity as the 
main fuel source would not be electric storage water heaters. For 
example, split-system heat pump water heaters that are gas-fired would 
be considered gas-fired storage water heaters. Gas-fired heat pump 
water heaters are addressed in section IV.B.1 of this document.
iii. Grid-Enabled Water Heaters
    Grid-enabled water heaters are a specific type of electric storage 
water heater with separate standards established by EPCA. (See 42 
U.S.C. 6295I(6)(A)(ii), also discussed in section III.B of this 
document). The statutory definition of a grid-enabled water heater 
describes its characteristics as a product which must be activated when 
enrolled with a utility, but it does not specifically define what 
connected features the product must have once enrolled. In the July 
2023 NOPR, DOE did not propose to define the connected features because 
DOE had not found it necessary at the time to further define 
connectivity.
    SkyCentrics and TVA requested that DOE include a requirement for an 
open standard communication port such as EcoPort (CTA-2045) or 
equivalent to be added to the product requirements for all electric 
storage water heaters with a storage volume larger than or equal to 32 
gallons. (TVA, No. 978 at pp. 1-2; SkyCentrics, No. 1191 at p. 1) TVA 
added that there are many water heater models with the port currently 
on or soon to be on the market, and stated that DOE can help promote 
this port as a national standard, helping OEMs benefit from volume 
production and reducing the cost of production by reducing SKUs with 
models that can be sold nationally. (TVA, No. 978 at pp. 1-2) AWHI also 
urged DOE to require CTA-2045 EcoPort in new electric storage water 
heaters, stating that industry partners would be ready for compliance 
with CTA 2045-B Level 2 as of July 1, 2025. (AWHI, No. 1036 at pp. 4-6)
    DOE is maintaining its determination from the July 2023 NOPR not to 
adopt any specific requirements to define connectivity in this 
rulemaking. With respect to grid-enabled water heaters, the scope of 
this product class is defined by EPCA, which does not posit any 
specific design requirements for the demand-response communication 
protocol. While DOE recognizes that industry may benefit from 
standardization of the communication protocols, demand-response 
technology is not known to be a design option to improve efficiency of 
the product over an average use cycle (see chapter 3 of the final rule 
TSD, which discusses DOE's technology assessment); hence, it was not 
considered in the design pathway for compliance with more stringent 
standards. While EPCA establishes the authority for DOE to amend energy 
conservation standards for consumer water heaters, it does not directly 
grant DOE the authority to establish prescriptive design requirements 
for consumer water heaters, particularly as it relates to a requirement 
that would not directly impact the measured energy efficiency as 
measured by the DOE test procedure. Instead, the ongoing work by the 
EPA's ENERGY STAR program is expected to promote the standardization of 
demand-response technology. Specifically, ENERGY STAR's version 5.0 
specification contains criteria for meeting the connected product 
designation, which references the CTA-2045 and OpenADR protocols.
    Additionally, in the July 2023 NOPR, DOE did not propose to amend 
standards for grid-enabled water heaters because there remains 
uncertainty as to whether these products can achieve higher UEF values 
with added insulation (reduced standby losses being the main pathway 
towards higher efficiency because grid-enabled water heaters are 
statutorily defined as having electric resistance heating). 88 FR 
49058, 49086.
    NRECA and ECSC supported DOE's proposed retention of existing 
standards for grid-enabled water heaters, adding that these larger 
water heaters remain an important load-control tool for their member 
electric cooperatives. (NRECA, No. 1127 at pp. 2, 10; ECSC, No. 1185 at 
p. 2) NYSERDA also supported DOE's proposals regarding grid-enabled 
water heaters and stated that there is additional opportunity to 
address demand-response functionality in a future rulemaking. (NYSERDA, 
No. 1192 at p. 4)

[[Page 37820]]

    CEC, however, urged DOE to reevaluate its conclusion that heat pump 
technology is not applicable as a technology option for grid-enabled 
water heaters, adding that although they are statutorily defined as 
``electric resistance water heaters'' (see 42 U.S.C. 
6295(e)(6)(A)(ii)), this definition does not preclude additional 
technologies, such as heat pumps. Therefore, CEC stated, the vast 
majority of hybrid grid-enabled water heaters employing both heat pump 
and electric resistance technologies would meet the statutory 
definition of grid-enabled water heater. (CEC, No. 1173 at pp. 11-12) 
The CA IOUs recommended that DOE amend standards for grid-enabled water 
heaters to be equivalent in stringency to those of other electric 
storage water heaters in a future rulemaking because these products 
directly compete with heat pump water heaters between 55 and 120 
gallons. The CA IOUs also requested that DOE comply with the terms of 
the 2015 legislation creating the grid-enabled water heater product 
type and release the two market data reports described in 42 U.S.C. 
6295(e)(6)(D)(i). (CA IOUs, No. 1175 at p. 5)
    At this time, DOE is not aware of any commercially available heat 
pump water heaters that also meet the statutory definition of a grid-
enabled water heater. Grid-enabled water heaters constitute an entirely 
separate product class, defined at 42 U.S.C. 6295(e)(6)(A)(ii) and must 
have a rated storage volume of more than 75 gallons. Not all demand-
response water heaters meet the definition of a grid-enabled water 
heater. While DOE agrees that it is technologically feasible for grid-
enabled water heaters to employ heat pumps to increase efficiency, such 
a product does not exist on the market. Manufacturers of certain models 
of heat pump water heaters in the electric storage water heater 
category, however, have certified these units' demand-response 
capabilities (which can be incorporated in water heaters outside of the 
grid-enabled product class) to ENERGY STAR, which indicates that heat 
pump innovation for grid-connected products can continue to occur in 
the absence of heat pump-level standards for grid-enabled water 
heaters; thus, it is unclear whether heat pump-level standards for 
grid-enabled water heaters would result in significant energy savings 
considering that shipments of electric storage water heaters dwarf 
those of grid-enabled water heaters today.\35\ In other words, 
consumers seeking demand-response capabilities with heat pump 
technology could be more likely to seek an electric storage water 
heater with a communication module than a grid-enabled water heater. 
DOE may further evaluate the potential for more stringent standards for 
grid-enabled water heaters in a future rulemaking addressing energy 
conservation standards for consumer water heaters.
---------------------------------------------------------------------------

    \35\ DOE included an assessment of grid-enabled water heaters in 
the March 2022 Preliminary Analysis. In shipments estimates, it was 
approximated that there were about 15 thousand shipments of grid-
enabled water heaters in 2021, compared to 3.8 million shipments of 
other electric storage water heaters. See the NIA spreadsheet to the 
March 2022 Preliminary Analysis, docketed as Document No. EERE-2017-
BT-STD-0019-0024 and available online at www.regulations.gov/document/EERE-2017-BT-STD-0019-0024.
---------------------------------------------------------------------------

    Rheem noted that EPCA (42 U.S.C. 6295(e)(6)(A)(ii)(I)) specifically 
defines grid-enabled water heaters on the basis that such a product 
``has a rated storage tank volume of more than 75 gallons,'' and that 
DOE would be misaligning the scope of coverage of the grid-enabled 
water heater product classes if it were to define these classes as 
being greater than 75 gallons of effective storage volume. (Rheem, No. 
1177 at p. 3)
    DOE agrees with Rheem and will maintain the current product class 
definition for grid-enabled water heaters, which is based on rated 
storage volume rather than effective storage volume. However, as 
discussed in section V.D.1.f of this document, DOE is adopting 
amendments to the appendix E test procedure that will effectively 
exempt grid-enabled water heaters from the high temperature test method 
such that there is not likely to be any appreciable difference between 
the two volume metrics as they pertain to standards for grid-enabled 
water heaters. Therefore, the standards for grid-enabled water heaters 
will apply to products with rated storage volume greater than 75 
gallons instead of an effective storage volume greater than 75 gallons, 
and this change from the July 2023 NOPR proposal is not expected to 
have any impact on the results of DOE's analysis or the scope of 
applicability of standards.
    AHRI indicated that there is an additional backsliding concern for 
grid-enabled water heaters but did not elaborate on details of the 
concern. The commenter claimed that grid-enabled water heaters will not 
work correctly unless they are enrolled in a utility program and noted 
that DOE is collecting information to determine if these products are 
used properly in the field. (AHRI, No. 1167 at p. 5)
    DOE has not identified any backsliding concerns for grid-enabled 
water heaters. Furthermore, maintaining the definition of this product 
class in terms of rated storage volume will mean no change to the 
standards for grid-enabled water heaters and therefore, no backsliding 
will occur. Regarding the functionality of grid-enabled water heaters, 
DOE agrees that grid-enabled water heaters will not function correctly 
unless enrolled in a utility program. Specifically, per 42 U.S.C. 
6295(e)(6)(A)(i), grid-enabled water heaters must possess an activation 
lock that requires a key to enable the product to operate at its 
designed specifications and capabilities and without which activation 
the product will provide not greater than 50 percent of the rated first 
hour delivery of hot water certified by the manufacturer. This 
requirement sets these products apart from other large electric storage 
water heaters with grid connectivity.
iv. 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 II.B.2 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 the July 2023 NOPR, DOE tentatively concluded that separate product 
classes for smaller electric storage water heaters are warranted. 88 FR 
49058, 49080-49081. Specifically, DOE noted that market data for 
electric storage water heaters suggest 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, which are commonly 
referred to as ``lowboy'' water heaters. The physical size limitation 
of these water heaters restricts the amount of hot water that can be 
provided to the household. Id.
    In reviewing the market for these water heaters, DOE found that 
most ``small electric storage water heaters'' offer an effective 
storage volume greater than or equal to 20 gallons and less than or 
equal to 35 gallons and deliver FHRs less than 51 gallons. Due to their 
low capacities, ``small electric storage water

[[Page 37821]]

heaters'' fall into the very small or low usage draw patterns. Thus, 
DOE tentatively concluded that this physical limitation is a 
performance-related feature affecting energy efficiency that would 
warrant a separate product class. DOE also explained that the physical 
size limitation constrains the technology options that can be 
considered to increase the efficiency of these water heaters. DOE, 
therefore, analyzed splitting the existing 20-55-gallon product classes 
for electric storage water heaters by establishing new ``small electric 
storage water heater'' product classes. Id.
    In the July 2023 NOPR, DOE identified the following proposed 
product classes for electric storage water heaters: (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 FHRs 
less than 51 gallons (i.e., very small and low draw patterns) (``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).
    Responding to the July 2023 NOPR, NEEA supported DOE's proposed 
creation of the small electric storage water heater product class, and 
noted that heat pump water heaters are sometimes too large to 
physically fit in the spaces currently occupied by these types of water 
heaters. (NEEA, No. 1199 at p. 8) The CA IOUs also supported DOE's 
proposal to create a new product class and separate electric 
resistance-level standards for small electric storage water heaters 
with effective storage volumes of >= 20 and <= 35 gallons limited to 
very small and low draw patterns. The CA IOUs agreed with DOE that 
there is a specific practicality provided by small electric resistance 
water heaters (also referred to as ``lowboys''), and that it is 
impractical to install currently available heat pump water heater in 
some spaces where lowboy water heaters are commonly installed. (CA 
IOUs, No. 1175 at p. 3)
    Rheem asserted that a large portion of 35-40-gallon heat pump water 
heater sales would be at risk with the structure of the product classes 
proposed in the July 2023 NOPR. Rheem stated that either the threshold 
for small electric storage water heaters should be lowered to 30 
gallons or the small electric storage water heater category be 
additionally restricted to products less than 36 inches in height 
(i.e., lowboys). (Rheem, No. 1177 at p. 7)
    PHCC stated that if DOE wished to limit certain products based on 
effective storage volume, the height is not a significant factor. The 
commenter asked DOE about the relevance of establishing the small 
electric storage water heater class based on a 36-inch height 
limitation while asserting that removing a height consideration would 
take pressure off the industry and streamline available models. PHCC 
also suggested DOE adjust the current heat pump-level standard for >55-
gal electric storage water heaters to apply to those >40 gallons as 
well. (PHCC, No. 1151 at p. 2)
    DOE is aware that certain 20-55-gallon heat pump water heaters may 
be interchangeable for some of the larger electric resistance water 
heaters in the small electric storage water heater product class and 
agrees with Rheem that some small electric storage water heaters may be 
substituted for larger products that would be subject to more stringent 
standards. As discussed in section IV.G.1 of this document, DOE has 
accounted for this in its analysis. Although the current limitation 
could lead to more substitution than if the volume threshold were 
lowered, DOE believes the small electric storage water heater product 
class, as proposed in the July 2023 NOPR, strikes the balance between 
preserving consumer utility at smaller storage volumes and ensuring 
heat pump water heaters are utilized where practicable to install. As 
such, DOE is adopting the small electric storage water heater product 
class, as proposed in the July 2023 NOPR. In response to PHCC, DOE 
notes that although a height restriction was included in the Joint 
Stakeholder Recommendation, DOE did not propose a height restriction on 
the small electric storage water heater product class in the July 2023 
NOPR. As shown in Table IV.4 of the July 2023 NOPR, small electric 
storage water heaters are defined by volume and delivery capacity only. 
88 FR 49058,49081. Additionally, DOE notes that PHCC's suggestion for 
expanding the applicability of heat pump-level standards is essentially 
what was proposed and is being adopted in this final rule. DOE is using 
a 35-gallon effective storage volume cutoff combined with a draw 
pattern requirement for small electric storage water heaters to be in 
the very small or low draw patterns. In its market assessment, DOE 
found that many products with nominal volumes of 40 gallons have rated 
storage volumes from 35 to 36 gallons because manufacturers may 
nominally report volumes that are within 10 percent of the actual 
storage volume. With respect to Rheem's suggestion that a height 
requirement be implemented, DOE notes that although most products on 
the market that fit into this category are ``lowboy'' products with 
limited overhead space, there are also products on the market that are 
physically constrained by their width or diameter. These tall, small-
diameter water heaters also have smaller storage capacities and 
delivery capacities. They also have the same energy consumption 
characteristics as lowboy water heaters based on certification data. In 
the April 2010 Final Rule, when DOE had first declined to establish a 
separate product class for lowboy water heaters, DOE stated that it 
does not believe each different combination of physical dimensions 
currently available on the market warrants a separate product class. 75 
FR 20112, 20131-20132. Consistent with the approach taken in the 
previous rulemaking, DOE has determined that separate standards for 
lowboy water heaters and these other shapes of small electric storage 
water heaters are not justified and, as a result, the product class 
definition should not specify a height restriction.
    Tabletop water heaters, which typically have rated storage volumes 
of around 35 gallons, also have very particular dimensions in order to 
be used in a kitchen workspace. DOE is not amending the standards for 
tabletop water heaters in this final rule based on the market 
assessment for these products (see section IV.C.2 of this document 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 proposed, 
in the July 2023 NOPR, to create alignment between the standards for 
these types of products. Specifically, DOE proposed 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, and any tabletop water 
heaters in the medium and high draw patterns would henceforth be 
considered in the broader electric storage water heater product 
classes. 88 FR 49058, 49081. In the July 2023 NOPR, DOE requested 
comment on its proposal to limit the tabletop water heater designation 
to products in the very small and low draw patterns.
    In response, AHRI supported the proposal to limit the tabletop 
water heater designation to the products in the very small and low draw 
patterns as it will prevent the use of tabletop water heaters as an 
avenue to bypass the current limitations on small electric storage 
water heaters. (AHRI, No. 1167

[[Page 37822]]

at p. 10) The Joint Advocacy Groups also supported DOE's proposal to 
limit the tabletop water heater designation to products in the very 
small and low draw patterns, as it would align the standards for 
tabletop water heaters with those for small electric storage water 
heaters and help ensure tabletop water heaters are not used as a less 
efficient substitute for conventional electric storage water heaters. 
(Joint Advocacy Groups, No. 1165 at pp. 6-7) Rheem supported DOE's 
proposed amendments to the tabletop water heater definition, indicating 
that this otherwise low-sales-volume product has the potential to be 
installed in place of heat pump water heaters. (Rheem, No. 1177 at p. 
8) A.O. Smith supported the changes proposed to the tabletop water 
heater standards even though it asserted that this may cause some 
issues for existing products. (A.O. Smith, No. 1182 at p. 15)
    BWC stated that re-defining tabletop water heaters as products that 
only meet either the very small or low draw pattern would remove half 
of the products from the market, even though this is a very small 
number of models. As a result, BWC stated, there would be a drastic 
reduction in model availability for consumers who rely on tabletop 
water heaters, many of which may be in densely populated, low-income 
households that have higher household occupancies and therefore require 
products with delivery capacities in the medium draw pattern. (BWC, No. 
1164 at pp. 15-16)
    In response to BWC, DOE notes that, in its market assessment of 
tabletop water heaters, there are only two basic models found to be 
certified and commercially available. One is in the low draw pattern, 
and the other has an FHR of 55 gallons, putting it into the medium draw 
pattern. Water heaters with FHRs less than 51 gallons can remain 
categorized as tabletop water heaters. Because the medium draw pattern 
tabletop water heater on the market today is very close to this FHR 
cutoff, in the July 2023 NOPR, DOE surmised that, with minimal design 
changes, a modified version of this model may remain on the market and 
be certified in the tabletop water heater category (see 88 FR 49058, 
49081). This would avoid limitations to consumer choice. In written 
comments in response to the NOPR, the two manufacturers that produce 
tabletop water heaters both supported the proposed updates to the 
tabletop water heater definition. Additionally, DOE is not aware of, 
nor did BWC provide, information to support BWC's assertion that many 
tabletop water heaters are used in households with higher occupancies 
that require the medium draw pattern. Therefore, DOE is finalizing the 
definition for tabletop water heaters as proposed.
    Additionally, given these insights regarding the market for 
tabletop water heaters, DOE is amending the product classes for 
tabletop water heaters to remove the storage volume-based product class 
boundary at 120 gallons. Comments indicate that the market for these 
products is limited and requires the specific use of the rectangular 
casing configuration with typical dimensions of 36 inches high, 25 
inches deep, and 24 inches wide. The maximum possible volume contained 
in these dimensions is approximately 94 gallons, hence DOE does not 
expect there to exist a market for tabletop water heaters larger than 
120 gallons. The amended product class structure for tabletop water 
heaters results in two volume-based categories: products less than 20 
gallons, and products greater than or equal to 20 gallons.
v. Very Large Electric Storage Water Heaters
    Responding to the July 2023 NOPR, Bosch, the Joint Advocacy Groups, 
the CA IOUs, Rheem, A.O. Smith, and AHRI all expressed concern that 
defining the >120-gallon electric storage water heater product class in 
terms of effective storage volume (rather than rated storage volume) 
could pose backsliding concerns given that it would be possible for 
electric resistance storage water heaters between 55 and 120 gallons to 
increase their effective storage volume to over 120 gallons by 
elevating tank temperatures, such that these products could circumvent 
the existing heat pump-level standards for electric storage water 
heaters which apply to rated storage volumes between 55 and 120 
gallons. (Bosch, No. 1204 at pp. 2-3; Joint Advocacy Groups, No. 1165 
at p. 8; CA IOUs, No. 1175 at pp. 3-4; Rheem, No. 1177 at p. 3; A.O. 
Smith, No. 1182 at p. 14; AHRI, No. 1167, pp. 5-6) Bosch and the CA 
IOUs also suggested that defining the greater than 120-gallon electric 
storage water heater product class in terms of effective storage volume 
could encourage a market shift towards larger electric resistance 
storage water heaters in place of smaller, <55-gallon heat pump water 
heaters. (Bosch, No. 1204 at pp. 2-3; CA IOUs, No. 1175 at pp. 3-4) 
Rheem noted that a product with a rated storage volume of 75 gallons 
could achieve an effective storage volume of 120 gallons at a storage 
tank temperature of 160 [deg]F. (Rheem, No. 1177 at p. 3)
    Multiple stakeholders suggested remedies to this potential problem. 
Bosch recommended that all electric storage water heaters (apart from 
very small electric storage water heaters) be required to utilize heat 
pump technology. (Bosch, No. 1204 at pp. 2-3) The CA IOUs suggested 
that DOE amend the calculations for effective storage volume such that 
products with rated storage volumes less than or equal to 120 gallons 
would be capped at an effective storage volume of 120 gallons. (CA 
IOUs, No. 1175 at pp. 3-4) Rheem suggested that DOE exempt products 
with rated storage volumes greater than 120 gallons from the high 
temperature test method because a >120-gallon product can already 
provide the same or more hot water than a heat pump water heater and 
thus does not rely on increasing its temperature to have a large 
effective storage volume. (Rheem, No. 1177 at p. 3) NYSERDA suggested 
that, rather than creating a separate product class for electric 
storage water heaters >120 gallons, DOE could instead remove the 120-
gallon cap and apply the same standards for electric storage water 
heaters >55 gallons to those >120 gallons. (NYSERDA, No. 1192 at p. 5)
    DOE agrees with stakeholders that defining the >120-gallon electric 
storage water heater product class in terms of effective storage 
volume, rather than rated storage volume, would pose a backsliding 
risk. However, as discussed in V.D.1 of this document, the high-
temperature test method does not apply to water heaters that are larger 
than 55 gallons in rated storage volume. Therefore, the scenarios 
described above of an electric resistance water heater having a rated 
volume less than 120 gallons and an effective storage volume greater 
than 120 gallons is not likely to occur without the use of the high 
temperature test method. As a result, there would be no risk of 
backsliding for these standards.
2. Technology Options
    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. 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

[[Page 37823]]

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 July 2023 NOPR, 
DOE presented a list of technologies that it identified for initial 
consideration in the NOPR analysis. 88 FR 49058, 49082-49083.
    In the technology assessment for the July 2023 NOPR, DOE examined 
120-volt heat pump water heater technology and noted that there were 
very few models of 120-volt heat pump water heater available on the 
market at the time. DOE therefore requested comment on the outlook for 
the emergence of 120-volt heat pump water heaters, information 
regarding how their design and operation could differ from 240-volt 
heat pump water heaters, and data on performance characteristics and 
efficiencies. 88 FR 49058, 49082.
    In response, AWHI commented that NEEA's Advanced Water Heating 
Specification version 8.01 contains a technical specification for a 
load shifting-capable 120-volt heat pump water heater, and that there 
are now three manufacturers that offer commercially available 120-volt 
heat pump water heaters ranging from 50 to 80 gallons. AWHI cited a 
preliminary market assessment conducted by New Buildings Institute 
stating that 22 to 30 percent of existing California homes could 
transition from fossil fuel-based water heaters to 120-volt heat pump 
water heaters without substantial site upgrades, and that the 
installation cost of 120-volt heat pump water heaters is significantly 
less that for 240-volt units due to minimal electrical interventions. 
AWHI stated that 120-volt heat pump water heaters do not need a 
dedicated circuit to be installed and can instead share a circuit with 
other appliances, reducing the impact of installation on the existing 
electrical infrastructure of the home. AWHI also stated that 120-volt 
heat pump water heaters do not have electric resistance elements, which 
results in slower recovery than 240-volt heat pump water heaters and 
are therefore more sensitive to environmental factors that impact 
compressor performance, such as input water temperature and ambient air 
temperature. AWHI stated that 120-volt heat pump water heaters 
incorporate integrated mixing valves and store water at temperatures 
above the delivery temperature to increase hot water capacity, which 
allows for easier participation in load shifting and demand-response 
programs. Lastly, AWHI stated that a 120-volt heat pump water heater 
performed at an overall average UEF of 2.90 and varied by season and 
use characteristics in a field study conducted in California by New 
Buildings Institute. (AWHI, No. 1036 at pp. 1-3)
    BWC supported DOE's tentative determination not to include 120-volt 
heat pump water heaters in its analysis because these products are 
relatively new and do not have significant market share at the present 
time. BWC stated a belief that it is appropriate for DOE, and the 
industry, to take more time to better understand these products before 
establishing regulations. (BWC, No. 1164 at p. 14)
    DOE appreciates the insight into 120-volt heat pump water heaters 
and continues to evaluate this technology. While DOE considers 120-volt 
heat pump water heaters to be a technology for improving the efficiency 
of electric water heaters, due to the nascent status of 120-volt heat 
pump water heaters, DOE did not consider 120-volt designs to constitute 
the main pathway towards higher efficiency for electric storage water 
heaters. However, as discussed in section V.C.1 of this document, the 
Department assessed TSLs with consideration of these designs. 
Specifically, when evaluating TSLs, DOE considered whether the 
potential standards levels would likely prevent new 120-volt designs 
from emerging onto the market.
    Responding to the July 2023 NOPR, NEEA supported DOE's inclusion of 
the gas pressure-actuated non-powered damper as a technology option, 
stating that it is likely the lowest cost pathway to achieving EL 2. 
(NEEA, No. 1199 at p. 9) DOE has maintained non-powered dampers as a 
technology option for the final rule.
    Additionally, while DOE identified modulating burners as a 
technology option for all gas-fired water heaters in the July 2023 NOPR 
technology analysis, DOE tentatively determined that modulating burners 
were used to increase UEF only in instantaneous gas-fired water 
heaters. 88 FR 49058, 49082. DOE did not receive any comments on that 
tentative determination. As discussed in section II.B.3 of this 
document, gas-fired instantaneous water heaters are no longer within 
the scope of this rulemaking. However, modulating burners could still 
be used in circulating gas-fired water heaters, which are a type of 
gas-fired storage water heater. Hence, in light of the classification 
of circulating water heaters as storage-type water heaters (see section 
IV.A.1.a of this document), DOE is retaining modulating burners in its 
list of technology options investigated for this final rule; however, 
as shown in chapter 5 of the TSD, modulating burners are not expected 
to be part of the representative, cost-effective design pathway to 
increasing efficiency for gas-fired storage water heaters. The 
technology options for Improving UEF in consumer water heaters are 
listed in Table IV.5 and described in chapter 3 of the final rule TSD.
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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 result 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.
    10 CFR part 430, subpart C, appendix A, sections 6(b)(3) and 7(b).
    In sum, 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 subsections 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 July 2023 NOPR, DOE screened out the following technology 
options based on the above criteria: absorption and adsorption heat 
pump water heaters, advanced insulation types, condensing pulse 
combustion, direct-fired heat exchange, dual-fuel heat pumps, buoyancy-
operated flue dampers, thermopile-operated flue dampers, reduced burner 
size (slow recovery), side-arm heating, two-phase thermosiphon 
technology, and U-tube flues. 88 FR 49058, 49083. Each of these 
technology options and the reasons for which they were screened out are 
discussed in detail in chapter 4 of the final rule TSD.
    BWC stated that it is aware of exclusive intellectual property 
protections that it asserted may inhibit manufacturers from utilizing 
certain technologies that are assumed by DOE to be available in the 
market to increase energy efficiency on certain consumer water heater 
products, and that BWC would be able to provide information in a 
confidential interview with DOE's consultants. (BWC, No. 1164 at p. 16)
    In selecting design options to improve efficiency in the 
engineering analysis, DOE performed teardowns of models manufactured by 
multiple companies to ensure that each efficiency level is achievable 
using non-proprietary designs.
    BWC supported DOE's tentative determination not to consider 
thermopile-powered flue dampers for gas-fired storage water heaters. 
(BWC, No. 1164 at p. 16)
    BWC stated that direct-vent and power-direct-vent gas-fired water 
heaters are not necessarily unsafe, but that their construction imposes 
limits on how these products can vent and operate; a major 
consideration for these products would be restrictions on the maximum 
allowable vent length that safety standards would permit. BWC requested 
that DOE consider these venting factors for gas-fired water heaters to 
avoid unintentionally encouraging installations that conflict with the 
requirements of safety standards such as ANSI Z21.10.1 and ANSI 
Z21.10.3. (BWC, No. 1164 at p. 16)
    DOE agrees with BWC that direct-vent and power-direct-vent gas-
fired water

[[Page 37826]]

heaters are safe to use when installed and operated in accordance with 
manufacturer recommendations and/or applicable safety standards. 
Therefore, DOE has not screened these technologies out of its analysis. 
In evaluating these technologies, DOE accounts for the necessary 
differences in venting systems installations (see section IV.F.2.b of 
this document).
2. Remaining Technologies
    Through a review of each technology, DOE concludes that all of the 
other identified technologies listed in section IV.A.2 of this document 
meet all five screening criteria to be examined further as design 
options in DOE's final rule 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.
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BILLING CODE 6450-01-C
    DOE 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). For additional details, see chapter 4 
of the final rule TSD.

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

[[Page 37827]]

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, the MIA, 
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 rulemaking, 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 final rule, DOE has analyzed standards with respect to the 
effective storage volume metric (as proposed in the July 2023 NOPR). 
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. As outlined in the July 2023 NOPR, there are two types of water 
heaters that can cause the system to store more energy than would be 
otherwise determined by the rated storage volume: (1) water heaters 
capable of operating with an elevated tank temperature, and (2) 
circulating water heaters. 88 FR 49058, 49086. In the June 2023 TP 
Final Rule, DOE established that compliance with the effective storage 
volume provisions (and, relatedly, the high temperature testing method 
and testing with separate storage tanks for circulating water heaters) 
would not be required until compliance with amended standards is 
required. 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. Certain provisions for circulating 
water heater testing are discussed further in detail in section V.D.2 
of this document. Section V.D.1 of this document discusses the proposed 
approach to consider efficiency determinations for water heaters tested 
using the high temperature testing method.
    In the July 2023 NOPR, DOE tentatively 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 that time 
based on the results of the market and technology assessment, screening 
analysis, interviews with manufacturers, and comments from interested 
parties. These assessments were discussed further in chapters 3 and 5 
of the NOPR TSD. 88 FR 49058, 49086.
    In this final rule, DOE has maintained the analytical approaches 
proposed in the July 2023 NOPR. For circulating water heaters, as 
discussed in section IV.A.1.a of this document, based on information 
from the December 2023 SNOPR, DOE has determined that these products 
offer the same consumer utility as storage-type water heaters, so the 
storage-type water heater standards would apply. In summary, Table IV.7 
presents the consumer water heater product classes along with the 
approach to analyzing them for this final rule.
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    Several commenters provided feedback about transitioning the energy 
conservation standards from a rated storage volume basis to an 
effective storage volume basis.
    AHRI provided comments emphasizing the possibility of market 
confusion resulting from amended standards being prescribed in terms of 
effective storage volume instead of rated storage volume, noting that 
the previous conversion from the EF to the UEF metric itself was not 
without issue, leading to market disruption given that utility programs 
across the United States and in Canada have still not fully adopted the 
UEF metric. AHRI stated that the effective storage volume metric needs 
to be further scrutinized to evaluate the representativeness and 
repeatability of the metric, and that manufacturers require additional 
time to analyze the effective storage volume calculation to determine 
its accuracy, representativeness, and repeatability, as well as to 
conduct laboratory testing to this end. AHRI asserted that the 60-day 
comment period for the July 2023 NOPR was insufficient to conduct this 
review.

[[Page 37829]]

AHRI recommended using only effective storage volume in the energy 
conservation standards equations for products for which the metric 
applies to limit confusion. (AHRI, No. 1167 at p. 5) AHRI requested 
clarification on whether the effective storage volume metric would 
apply to grid-enabled water heaters, tabletop water heaters, and 
electric instantaneous water heaters larger than 2 gallons in rated 
storage volume, recommending that the effective storage volume metric 
not apply to grid-enabled water heaters. AHRI proposed two possible 
options to mitigate potential market confusion from the new effective 
storage volume metric: use rated storage volume for all product 
categories not subject to high temperature testing; or (the option AHRI 
stated was less preferable), include a footnote with the standards to 
indicate those product categories for which effective storage volume is 
identical to rated storage volume. (AHRI, No. 1167 at p. 6)
    BWC commented that the replacement of the rated storage volume 
metric with effective storage volume deviates from the Joint 
Stakeholder Recommendation and could create situations where products 
may not be capable of supplying adequate hot water to the home. (BWC, 
No. 1164 at p. 1) BWC requested DOE not change the standards for all 
product classes to be in terms of effective storage volume, but instead 
to use the new metric only for product classes for which the rated 
storage volume and effective storage volume are expected to be 
different in order to avoid confusion. (BWC, No. 1164 at p. 9)
    CEC identified a drafting error in the proposed regulatory language 
in the heading at 10 CFR 430.32(d)(1) and (2), where ``rated storage 
volume'' is used rather than ``effective storage volume.'' (CEC, No. 
1173 at pp. 12-13) This was a publication error printed at 88 FR 49058, 
49176. Stakeholders were notified of this typographical error in the 
September 13 Public Meeting. (Public Meeting Transcript, No. 1190 at p. 
101).
    In response, DOE maintains that effective storage volume is 
appropriate for use for all classes. In light of the reclassification 
of circulating water heaters as storage-type water heaters, defining 
all classes in terms of effective storage volume (rather than just 
electric storage classes, as was suggested by stakeholders) and 
delineating the standards as a function of effective storage volume is 
necessary to ensure the appropriate classification of these products. 
More specifically, because circulating water heaters will be considered 
part of the storage-type product classes, the same standards will apply 
to circulating water heaters. Where the standards for storage-type 
product classes are linear functions of volume, the purpose of this is 
to account for the additional standby loss that comes with more hot 
water being contained in the system. The effective storage volume of a 
circulating water heater is what captures the amount of hot water 
contained in this type of system, and therefore is most appropriate to 
base the standards equations on. Stakeholders correctly noted that the 
use of the high temperature test method (described in section V.D.1 of 
this document), which will apply to certain types of electric storage 
water heaters, is one way by which a model can have an effective 
storage volume different from its rated storage volume. Further, per 
section 6.3.1.1 of appendix E test procedure, the effective storage 
volume can be higher than the rated storage volume for any storage-type 
water heater if the mean tank temperature is more than 5 [deg]F higher 
than the delivery temperature (see section V.D.1 of this document for 
details). Therefore, DOE adopts use of effective storage volume rather 
than storage volume in this final rule.
1. Product Classes With Current UEF-Based Standards
    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 July 2023 NOPR, 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 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 based on the feedback DOE received.
a. Efficiency Levels
    In this final rule, as noted previously, DOE has analyzed 
efficiency levels for UEF that are a function of effective storage 
volume (with the exception of certain levels which were analyzed when 
DOE incorporated feedback from 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.\36\ 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.
---------------------------------------------------------------------------

    \36\ As discussed in section III.C 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 this final rule, DOE has analyzed the same efficiency levels as 
were considered in the July 2023 NOPR. The details of the efficiency 
level analysis

[[Page 37830]]

are presented in chapter 5 of the final rule TSD, and a summary of the 
efficiency levels is presented in the following sections.
i. 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 final rule, the baseline efficiency levels for product 
classes with current UEF-based standards are equal to the current 
energy conservation standards (see Table II.1).
ii. 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 July 2023 NOPR, 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.
    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 increasing the 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 
final rule TSD.
    In the NOPR engineering analysis, DOE considered split-system heat 
pump water heaters as a representative design strategy for small 
electric storage water heaters because small electric storage water 
heaters are typically configured for applications with limited vertical 
clearance. Whereas integrated heat pump water heaters are typically 
designed with the heat pump components affixed to the top of the 
storage tank (significantly increasing the height of the water heater), 
split-system heat pump water heaters have the advantage of being able 
to install the heat pump in a remote location so that the storage tank 
height does not change. However, there are currently no models of 
split-system heat pumps for small electric storage water heaters on the 
market today, so DOE estimated the performance of a hypothetical design 
based on circulating heat pump water heaters and lowboy water heaters 
that were available at the time of the July 2023 NOPR. See chapter 5 of 
the NOPR TSD for further details. To ensure that the analysis is 
representative, in the July 2023 NOPR, DOE requested information about 
the potential design specifications, manufacturing processes, and 
efficiencies of split-system heat pump water heaters. 88 FR 49058, 
49091.
    In response to DOE's request for information regarding split-system 
heat pump water heaters, Rheem noted that it had identified a dual-fuel 
combination heat pump water heater and boiler product manufactured by 
its sister company in the Netherlands. (Rheem, No. 1177 at p. 8)
    DOE reviewed product literature for the dual-fuel split-system heat 
pump water heater mentioned by Rheem, marketed in the Netherlands as 
the Intergas Xtend model. While dual-fuel heating is being screened out 
from this rulemaking analysis (see section IV.B.1 of this document), 
details about this design provide valuable information about the 
performance potentials for split-system heat pump water heaters 
(operating in heat pump-only mode). The Xtend split-system heat pump 
water heater has a reported coefficient of performance (``COP'') of 
4.68, uses R-32 refrigerant, has a total heating capacity of 5 kW (over 
17,000 Btu/h), and is designed for combination space and domestic hot 
water heating.\37\ Based on the COP rating, DOE understands that this 
product identified by Rheem would likely have a UEF rating higher than 
the max-tech efficiency analyzed for small electric storage water 
heaters. However, after reviewing this design, DOE determined two main 
factors which lead to uncertainty as to whether this design is viable 
for small electric storage water heaters. First, the use of R-32 
refrigerant (which has not been demonstrated in water heaters in the 
United States market) and the resulting total capacity of over 17,000 
Btu/h is more akin to the designs of single-split space-constrained 
air-source heat pump air conditioners, which range between 15,200 and 
23,800 Btu/h in DOE's CCD. In contrast, teardown analyses of heat pump 
water heaters show that these systems typically have much smaller 
compressors than do central (i.e., whole-home) air conditioners, and 
therefore the Xtend water heater model as well. In addition, due to the 
higher capacity of the Xtend model, this product is more likely to 
function in the medium or high draw patterns, meaning that it does not 
serve the same consumer utility as a small electric storage water 
heater. This is because a much larger compressor would have very low 
run time (causing technical difficulties for refrigerant circulation), 
be noisier, and significantly increase the footprint of the heat pump 
module. As a result, it remains unclear whether split-system heat pump 
small electric storage water heaters are able to employ the same design 
options to achieve the higher efficiency of the Xtend model. DOE will 
continue to evaluate technologies for split-system heat pump water 
heaters in future

[[Page 37831]]

rulemakings addressing consumer water heater standards.
---------------------------------------------------------------------------

    \37\ Product information can be found online at: www.intergas-
verwarming.nl/consument/producten/xtend/ (Last accessed: Nov. 17, 
2023).
---------------------------------------------------------------------------

    In the July 2023 NOPR, DOE presented its efficiency levels for 
analysis and specifically requested further information on the 
technologies employed in 45-gallon medium draw pattern electric storage 
products at a UEF of 3.50 (which would potentially help with re-
evaluating EL 2). 88 FR 49058, 49090. DOE did not, however, receive any 
comments on this particular topic.
    Commenting more specifically on the electric storage water heater 
efficiency levels analyzed in the July 2023 NOPR, BWC noted that the 
Joint Stakeholder Recommendation originally suggested a minimum UEF of 
2.0 for some of the smallest volumes of electric storage water heaters, 
and the NOPR proposes a level of 2.3 UEF. BWC asserted that a minimum 
UEF of 2.0 would be necessary in some products to allow manufacturers 
more flexibility to innovate new designs and reduce the cost of heat 
pump water heaters, which it stated will be critical for consumers to 
purchase these products because key rebates and tax incentives will 
expire in the early 2030s. However, BWC stated that it still supported 
electric resistance-level standards for small and very small electric 
storage water heaters, and that, generally, redesigns for these 
products would not be necessary to meet the proposed minimum efficiency 
standards. (BWC, No. 1164 at pp. 1-2)
    In response to BWC, DOE notes that products exceeding 2.3 UEF are 
widely available across a range of capacities, indicating that this 
level is readily achievable, and thus analyzing an additional 
efficiency level at a UEF of 2.0 would be unlikely to provide 
additional benefit. As discussed in chapter 5 of the final rule TSD, a 
UEF of 2.0 is expected to correspond to split-system heat pump water 
heaters in the small electric storage water heater product category, 
which, as a result of the heat pump design, have certain limitations to 
achieving higher efficiencies. Electric storage water heaters that are 
not ``small electric storage water heaters'' do not have the same 
design limitations and can achieve higher efficiencies with integrated 
heat pump water heater designs (where the heat pump is adjoined at the 
top of the tank). Additionally, split-system designs are typically more 
expensive to manufacture compared to integrated designs, meaning that 
the most cost-effective pathway to achieving higher efficiencies would 
most likely be through integrated designs. (See section IV.C.1.e of 
this document and chapter 5 of the final rule TSD for estimated 
manufacturer production costs of both styles of heat pump designs.) In 
the selection of efficiency levels for these larger water heaters, DOE 
considered the certified UEF ratings of integrated heat pump water 
heaters on the market, the ENERGY STAR v5.0 specification, the Joint 
Stakeholder Recommendation, and its own test data. Based on these 
sources, a UEF of 2.3 was determined to be most representative of a 
low-cost heat pump water heater design for non-small electric storage 
water heaters.
    Earlier in this rulemaking DOE received comments from some 
stakeholders who suggested 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. In the July 2023 
NOPR, DOE noted 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. 88 FR 
49058, 49090.
    BWC agreed with not including an efficiency level for electric 
storage water heaters that specifically pertained to a heat pump design 
that did not have backup electric resistance elements on the basis that 
not only would a higher efficiency standard pose significant challenges 
for the industry transition to heat pump water heaters, but also that 
the efficiency benefits of not having a backup electric resistance 
element would not be demonstrated by the current appendix E test 
procedure and UEF metric. (BWC, No. 1164 at pp. 16-17)
    Essency stated it has achieved an FHR of 80 gallons and a UEF of 
0.93 with electric resistance technology and suggested that max tech 
for electric resistance water heaters has not yet been reached. 
(Essency, No. 1194 at p. 1) GreenTECH stated that it is currently 
developing a fully electric consumer heat pump water heater with 
projected energy savings of 50 percent compared to current models and 
that utilizes peak amperage of less than 10 amps at 220 volts for a 50-
gallon comparable model. (GreenTECH, No. 71 at p.1)
    In response to Essency, DOE previously considered an efficiency 
level that corresponded to increased insulation for electric resistance 
storage water heaters (see the March 2022 Preliminary Analysis). 
However, DOE received many comments from manufacturers indicating that 
it may not be practical to incorporate more insulation in the 
manufacturing process, after which DOE had revised EL 1 to reflect a 
baseline heat pump efficiency instead. 88 FR 49058, 49089. In response 
to GreenTECH, based on its review of the components that are used in 
conventional 240-volt heat pump water heaters, DOE expects that there 
would not be any appreciable difference in technology or design between 
conventional 240-volt heat pump water heaters and a 220-volt heat pump 
water heater as described by GreenTECH. However, because GreenTECH did 
not provide further details regarding their design, which is currently 
commercially unavailable, DOE was unable to evaluate GreenTECH's 
suggestions as a max-tech efficiency level.
    NEEA urged DOE to consider gas absorption or adsorption heat pump 
water heaters as max-tech, adding that statutorily, DOE is not limited 
to commercially available technologies. NEEA noted that multiple 
technology developers and manufacturers are advancing gas heat pump 
water heaters for the residential market, many of which are expected to 
be commercialized by 2025. (NEEA, No. 1199 at pp. 9-10)
    In response to comments from NEEA, DOE did not consider gas-fired 
absorption or adsorption heat pumps for the max-tech levels because, as 
discussed in section IV.B of this document, these technologies were 
screened out for not being practicable to manufacture, install, or 
service on the scale necessary to serve the consumer water heater 
market upon the compliance date of the amended standards. For more 
details on the screening analysis, see chapter 4 of the final rule TSD.
    AWHI encouraged DOE to consider efficiency levels for gas-fired 
storage water heaters that couple 120-volt electric-readiness with gas-
fired water heater installations to minimize the burden of future 
electrification requirements. AWHI cited a comment from Rheem made in 
response to the March 2022 Preliminary Analysis recommending that DOE 
add a higher efficiency level for gas-fired storage water heaters that 
would require electricity but is achievable with a Category-I venting 
solution. AHWI stated that adopting such a standard level would, upon 
the second replacement of an existing gas-fired water heater after the 
compliance date of this rule, give consumers the option to install 
drop-in replacement 120-volt heat pump water heaters because the 120-
volt electricity connection would already exist (being necessary to 
meet

[[Page 37832]]

such a standard). (AWHI, No. 1036 at p. 4)
    In response to AWHI, DOE notes that it does consider an efficiency 
level for gas-fired storage water heaters that requires electricity and 
is achievable with category I venting, which is identified as EL 2B 
(see section IV.C.1.b of this document) and includes an electric flue 
damper but uses category I venting. Beyond that level, based on review 
of the market and technologies currently being used, DOE has concluded 
the most likely design pathway to improved UEF would be to increase 
flue baffling, which would require use of category III venting (i.e., 
``power venting'').
    CEC requested DOE establish more stringent standards for gas-fired 
storage water heaters and, if necessary, proceed with a separate rule 
for gas-fired storage water heaters to avoid delaying the finalization 
of other settled portions of the proposed rule. CEC added that primary 
innovation needed make substantial efficiency improvements to gas-fired 
storage water heaters is to implement a spiral flue, which will 
exchange more heat from the combusted gas to the water. (CEC, No. 1173 
at p. 4)
    In response to CEC, DOE agrees that a ``spiral'' (helical) flue is 
one of the main technological improvements that allows gas-fired 
storage water heaters to have condensing-level efficiencies. DOE notes 
that the manufacture and design of these flues is a complicated and 
expensive process, and spiraling flues have added material costs due to 
the significantly longer flue length. Additionally, manufacturers must 
adjust designs to account for the tank volume that the flue takes up: 
the more space the flue takes up in the tank, the less tank volume 
there is left to store the hot water. These costs are reflected in the 
manufacturer production costs (``MPCs'') and conversion cost estimates 
for ELs 4 and 5 for gas-fired storage water heaters, and they 
eventually result in higher-priced products for consumers. DOE 
evaluated whether standards at condensing efficiency levels were 
economically justified taking into account these costs (see section 
V.C.1 of this document.)
    After considering these comments, DOE has maintained the efficiency 
levels from the July 2023 NOPR.
iii. Efficiency Levels by Product Class
    DOE's analysis for efficiency levels above baseline is discussed in 
more detail in chapter 5 of the final rule 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''.
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BILLING CODE 6450-01-C
b. Design Options
    Based on its teardown analyses and feedback provided by 
manufacturers in confidential interviews, DOE 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 final rule TSD.
    Ravnitzky indicated that DOE acknowledges that increased tank 
insulation can improve the efficiency of storage-type water heaters and 
questioned DOE's decision not to consider increased insulation 
thickness as a feasible technology option for electric storage water 
heaters. Ravnitzky claimed that, with sufficient insulation, non-heat 
pump water heaters can be nearly as efficient as heat pump water 
heaters. (Ravnitzky, No. 73 at p. 1)
    DOE agrees that increased insulation thickness can improve the 
efficiency of storage-type water heaters and notes that increased 
insulation thickness is considered as a design option for increasing 
the efficiency of gas-fired and oil-fired storage water heaters. In 
addition, as discussed in the July 2023 NOPR, DOE initially considered 
an efficiency level for electric storage water heaters based on 
increased insulation thickness in the March 2022 Preliminary Analysis. 
However, in the July 2023 NOPR, DOE explained that in response to 
stakeholder feedback \38\ on the March 2022 Preliminary Analysis,

[[Page 37834]]

the first efficiency level design option for electric storage water 
heaters was changed to include heat pump technology, which DOE noted 
was more representative of the next level up from baseline. 88 FR 
49058, 49089. Given the insulation thicknesses DOE has observed in 
models currently on the market, DOE maintains its position that the 
most likely design path for improving heat pump water heater efficiency 
above the baseline level would be through use of heat pump technology. 
Increasing insulation thicknesses to the point required to 
substantially increase the UEF of electric storage water heaters beyond 
what is required by the current standard may not be feasible. 
Therefore, for this final rule DOE has maintained the efficiency levels 
(and associated design options) for electric storage waters from the 
July 2023 NOPR.
---------------------------------------------------------------------------

    \38\ Specifically, DOE explained that feedback from multiple 
sources indicated 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).
---------------------------------------------------------------------------

    In addition, DOE disagrees with the notion that non-heat pump water 
heaters could be made to be as efficient as heat pump water heaters 
through insulation thickness increases. Even if standby losses were to 
be completely eliminated, the electric resistance elements used for 
heating non-heat pump electric storage water heaters have a maximum 
theoretical efficiency of 100 percent, resulting in a maximum UEF of 
1.00. Heat pump water heaters achieve efficiencies greater than 1.00 by 
extracting more heat energy from their surroundings than is required 
for them to operate, which non-heat pump water heaters are incapable 
of.
    BWC generally supported the design options DOE selected at the NOPR 
stage. (BWC, No. 1164 at p. 16) However, BWC reiterated its comments 
indicating that gas-fired storage water heaters can only use 1 inch of 
insulation in certain circumstances, and that it should not be 
considered as the baseline design option. BWC stated that 1 inch of 
insulation would not be capable of meeting the current standards, and 
only certain models designed to accommodate space constraints may come 
with 1 inch of insulation. The decreased insulation from 2 inches, BWC 
stated, has a drawback in lowering the FHR and recovery rate of the 
model. (BWC, No. 1164 at p. 17)
    DOE believes that BWC may have misunderstood the design options 
that were modeled for the baseline efficiency level for gas-fired 
storage water heaters in the engineering analysis. Based on teardown 
analyses, DOE did determine that products with 1 inch of insulation can 
meet the existing standards, but only for the low draw pattern and the 
medium draw pattern.\39\ At the NOPR stage, DOE took into account BWC's 
feedback about decreased FHRs and slower recovery rates. 88 FR 49058, 
49094. These factors lead to gas-fired storage water heaters with only 
1 inch of insulation also having smaller burners with lower input 
ratings. Products in the high draw pattern require larger burners. In 
the NOPR engineering analysis, DOE increased the insulation thickness 
for the high draw pattern designs of gas-fired storage water heaters. A 
thickness of 1.5 inches was used based on teardown samples of high draw 
pattern gas-fired storage water heaters at the representative size. Id. 
(See chapter 5 of the NOPR TSD.) However, this specifically pertained 
to side insulation. After reviewing BWC's comments and its own teardown 
samples, DOE has again updated the design option for high draw pattern 
gas-fired storage water heaters to use 1.5 inches of side insulation 
and 2 inches of top insulation to reflect the minimum amount of 
insulation necessary to meet the current standards.
---------------------------------------------------------------------------

    \39\ There are no gas-fired storage products certified within 
the very small draw pattern.
---------------------------------------------------------------------------

    Table IV.13 through Table IV.17 show the design options at each UEF 
level analyzed for this final rule. DOE maintained the design options 
as they were discussed in the July 2023 NOPR.
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BILLING CODE 6450-01-C
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:
    [squ] 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.
    [squ] 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.
    [squ] 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 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.
    To perform this analysis, DOE selects representative capacities for 
each product class. These capacities reflect the most common or average 
size of a water heater in that product class, and this step is 
important because the MPC is dependent upon the size of the water 
heater--larger water heaters cost more to manufacture. The 
representative capacities analyzed in this rulemaking are detailed in 
chapter 5 of the final rule TSD. With the exception of one case, DOE 
has determined that the representative capacities analyzed in the July 
2023 NOPR remain representative at this final rule stage. In this final 
rule analysis, DOE determined that a capacity of 75 gallons is more 
representative of units within the high draw pattern for electric 
storage water heaters in the 55-120-gallon range than 80 gallons, based 
on the distribution of units currently on the market (see appendix 3A 
to the final rule TSD). DOE therefore updated its analysis accordingly 
for this product class to use 75 gallons as the representative 
capacity.
    In this rulemaking, DOE selected representative capacities for 
storage-type water heaters based on rated storage volume.
    A.O. Smith agreed that heat pump water heaters are technologically 
feasible alternatives to electric resistance storage water heaters; 
however, A.O. Smith stated that 50-gallon heat pump water heaters are 
not always feasible replacements for 50-gallon electric resistance 
storage water heaters because, even for units with the same FHR, the 
heat pump offers a slower recovery that may not keep up with household 
demand. Additionally, A.O. Smith commented, homeowners must consider 
factors like ambient air temperature conditions when switching to a 
heat pump water heater, and it is often recommended to ``upsize'' when 
transitioning to a heat pump water heater so that performance 
expectations are not diluted. (A.O. Smith, No. 1182 at pp. 7-8)
    DOE understands the commenter to be suggesting that, when 
evaluating the cost to improve efficiency, it may be more appropriate 
to consider representative capacities using a metric other than rated 
storage volume (e.g., the FHR delivery capacity metric). The FHR 
determines which draw pattern a water heater falls into, and the 
engineering analysis selects representative characteristics for each 
draw pattern to determine cost and efficiency. While some consumers may 
opt to upsize when transitioning to heat pump water heaters, because 
the efficiency levels analyzed do not preclude designs with backup 
resistance heating elements, such ``hybrid'' heat pump water heaters 
can still achieve faster recoveries when the backup elements are used 
(the recovery rate of a backup element is independent of the ambient 
air conditions). Hence it would

[[Page 37837]]

not be mandatory to upsize if installing a typical hybrid heat pump 
water heater. Thus, in this engineering analysis, DOE has maintained 
analysis points based on rated storage volume as opposed to other 
capacity metrics such as input rate or FHR. A separate consideration 
for maintaining the FHR is not necessary given the analysis is 
performed for each draw pattern separately. DOE did, however, perform a 
separate analysis to address the impact of ambient air conditions on 
heat pump water heater energy usage (see section IV.E of this 
document).
    The results of DOE's cost-efficiency analysis for this final rule 
are shown in section IV.C.1.e of this document.
    In response to the July 2023 NOPR, Rinnai pointed to a peer review 
report by the National Academy of Science, Engineering and Medicine 
(``NAS'') \40\ and stated that DOE's teardown analyses and cost 
reconstructions for existing products and newer high-efficiency designs 
is flawed and produces systematically underestimated costs (Rinnai 
suggested these costs were underestimated by roughly 30-50 percent). 
Rinnai stated that these underestimates to MPC lead to overstated LCC 
savings, and that DOE should instead look to market pricing to 
determine product cost or use market prices to validate other 
estimates. (Rinnai, No. 1186 at p. 33)
---------------------------------------------------------------------------

    \40\ National Academy of Science, Engineering and Medicine, 
``Review of Methods Used by the U.S. Department of Energy in Setting 
Appliance and Equipment Standards'' (2021), ISBN 978-0-309-68545-0/
DOI 10.17226/25992.
---------------------------------------------------------------------------

    The rulemaking process for standards of covered products and 
equipment are outlined at appendix A to subpart C of 10 CFR part 430, 
and DOE periodically examines and revises these provisions in separate 
rulemaking proceedings. The recommendations in the NASEM report, which 
pertain to the processes by which DOE analyzes energy conservation 
standards, will be considered in a separate rulemaking considering all 
product categories.
    As described in section IV.D of this document, under a more 
stringent standard, the mark-ups incorporated into the sales price may 
also change relative to current mark-ups. Therefore, DOE has concluded 
that basing the engineering analysis on prices of water heaters as 
currently seen in the marketplace would be a less accurate method of 
estimating future water heater prices following an amended standard 
than DOE's approach of conducting an engineering analysis and mark-ups 
analysis. (However, as noted earlier, price surveys are sometimes 
required when other methods are infeasible.) When relying on retail 
market data, the prices will include ``premium'' (i.e., non-efficiency-
related) features and do not account for the likely changes in designs, 
market, and pricing that would occur under an amended standard. 
Differences between online vendors with respect to mark-up and pricing 
practices could lead to online prices being unrepresentative for the 
overall market.
    In response to the July 2023 NOPR, Rheem generally agreed with 
DOE's manufacturer production cost estimates, stating that they 
appeared reasonable for electric storage water heaters when the removal 
of non-efficiency related features and economies of scale are accounted 
for. (Rheem, No. 1177 at p. 8) BWC generally agreed with the gas-fired 
storage water heater manufacturer production cost estimates provided in 
the July 2023 NOPR, but noted that the MPC estimates for electric 
storage water heaters were inconsistent with its experience. BWC stated 
that it would welcome further opportunities to discuss this specific 
matter confidentially with DOE for this rulemaking. (BWC No. 1164 at p. 
17)
    As discussed in the July 2023 NOPR, DOE's consultants routinely 
conduct confidential manufacturer interviews to gather feedback on 
various analytical inputs, which are then aggregated for use in the 
analysis. Cost analyses are updated based on feedback where 
appropriate. 88 FR 49058, 49095. 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. Id. DOE's 5-year average 
metal cost data have been updated to reflect prices for the most recent 
5-year period ending August 2023. For all other material and component 
prices, DOE used the most recent prices available at the time of the 
analysis (i.e., August 2023). As discussed, the MPC estimates used in 
this rulemaking reflect what would be the market-average product cost 
to manufacture a model that meets the efficiency level, excluding the 
cost of optional features that do not affect the efficiency of the 
product, and these estimates take into account what the designs and 
component costs would be in a standards-case-scenario. Because the 
metal prices used may deviate from the most recent year's and because 
the designs modeled reflect market averages in a standards-case-
scenario without optional non-efficiency-related components, the MPC 
estimates resulting from this analysis may not exactly reflect the 
designs of any one specific manufacturer today.
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, and the weight. 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 small units that can 
be double-stacked, including 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 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 the most recent reference 
year for prices (i.e., 2022 for the July 2023 NOPR and 2023 for this 
final rule). 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 (based on a calculation of whether the 
quantity is limited by space or by weight), for each product class and 
efficiency level.
    In the July 2023 NOPR, DOE requested feedback on the analysis 
assumptions used to estimate shipping costs for consumer water heaters.
    BWC stated that the shipping cost estimates provided in the July 
2023 NOPR were generally consistent with its expectations, and that it 
is correct to assume that water heaters typically do not ship in less-
than-truckload

[[Page 37838]]

configurations; however, real-world circumstances (such as one truck 
delivering orders to multiple wholesalers) prevent truckloads from 
consisting of solely one type of water heater. (BWC, No. 1164 at p. 18) 
However, BWC did not agree with the Department's assumption that each 
truckload would only consist of one type of water heater. In their 
experience this rarely occurs since truckloads are scheduled to fulfill 
multiple orders from multiple customers who are rarely ordering 
identical products. (BWC No. 1164 at p. 18)
    DOE agrees with BWC that manufacturers do not always ship trucks 
completely full of one type of water heater. The shipping costs in the 
real world vary with a multitude of factors that are difficult to model 
and predict. For storage-type water heaters that are shipped with 
tankless water heaters, DOE expects the shipping costs it assumed to be 
conservatively high, because the estimate is based on a truck full of 
only storage-type water heaters (which would, as a result, not be able 
to carry as many products due to the size of the storage-type water 
heaters).
    After considering the feedback received on shipping costs, DOE 
maintained the methodology from the July 2023 NOPR for this final rule 
but updated the cost per trailer using the most recent data available. 
The shipping costs are shown in section IV.C.1.e of this document.
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, 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.
    For heat pump water heaters specifically, BWC urged the Department 
to consider price impacts related to the Federal American Innovation 
and Manufacturing (``AIM'') Act of 2020, codified at 42 U.S.C. 7675. 
BWC noted that this legislation calls for a gradual phasedown of 
refrigerant products that are currently predominant in heat pump water 
heater designs, and stated that the provisions in the AIM Act will 
compel manufacturers to pivot to more costly refrigerants when 
producing heat pump water heater products. (BWC No. 1164 at p. 18)
    In response, DOE notes that the AIM Act authorizes EPA to address 
hydrofluorocarbons (``HFCs'') in three main ways: phasing down HFC 
production and consumption through an allowance allocation program; 
promulgating certain regulations for purposes of maximizing reclamation 
and minimizing releases of HFCs from equipment; and facilitating 
sector-based transitions to next-generation technologies. (See 42 
U.S.C. 7675) Regarding the gradual phasedown of HFC refrigerants with 
high global warming potential (``GWP''), the AIM Act mandates the 
phasedown of HFCs by 85 percent over a period ending in 2036, following 
the schedule outlined in the AIM Act. (42 U.S.C. 7675(e)(2)(C)) DOE 
notes that the engineering analysis incorporates up-to-date cost 
estimates (including the cost of refrigerants currently used in heat 
pump water heaters).
    For this final rule, DOE reviewed EPA rulemakings pertaining to the 
phasedown of HFC production and consumption and sector-based 
transitions to next-generation technologies. Regarding the sector-based 
transitions under subsection (i) of the AIM Act, EPA published a final 
rule restricting the use of HFCs in specific sectors or subsectors on 
October 24, 2023 (``October 2023 EPA Final Rule''). 88 FR 73098. In the 
October 2023 EPA Final Rule, EPA does not adopt provisions to restrict 
the use of high-GWP refrigerants in heat pump water heaters. DOE 
understands that manufacturers may voluntarily invest in low-GWP 
systems for future heat pump water heater designs, however, such 
systems would not be mandatory as a result of Federal regulation at 
this time. However, the October 2023 EPA Final Rule does restrict the 
use of HFCs and blends containing HFCs with a GWP of 150 or greater 
beginning January 1, 2025 for all foam subsectors, including rigid 
polyurethane for use in water heaters. 88 FR 73098, 73183-73184. As 
discussed in chapter 3 of the final rule TSD, DOE has found that water 
heater manufacturers have already begun transitioning to alternative 
blowing agents for insulation foam, therefore this regulation is not 
expected to impact manufacturer production costs for consumer water 
heaters.
    DOE maintained the same methodology as the July 2023 NOPR to 
develop the cost-efficiency results for this final rule, as detailed in 
section IV.C.1.c of this document. The results of DOE's analysis are 
listed in Table IV.18 through Table IV.23.
    See chapter 5 of the final rule TSD for more details concerning 
these results.

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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.
    For the July 2023 NOPR, DOE applied a similar methodology to 
translate from minimum efficiency levels denominated in EF to those in 
UEF for classes of covered consumer water heaters that do not yet have 
UEF-based standards. The translated standards are shown in Table IV.24.

[[Page 37842]]

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[[Page 37843]]


[GRAPHIC] [TIFF OMITTED] TR06MY24.039

a. Crosswalk to Equivalent-Stringency UEF-Based Standards
    In the July 2023 NOPR, DOE requested feedback regarding the 
appropriateness of the proposed converted UEF-based standards and 
whether products on the market can meet or exceed the proposed levels. 
88 FR 49058, 49100.
    A.O. Smith noted that DOE initially proposed UEF levels for several 
of these classes in the supplemental notice of proposed rulemaking 
published on August 30, 2016 (``August 2016 Conversion Factor SNOPR''). 
81 FR 59736. DOE, however, decided to forgo adopting the proposed 
levels for these classes in the December 2016 Conversion Factor Final 
Rule. A.O. Smith stated that DOE wrote it ``Received voluminous 
comments regarding the technical merits of the conversion factors and 
the converted standards expressed in UEF for the water heaters listed 
in Table III.1 for which DOE is going to defer finalizing and 
implementing these statutory standards and further consider the 
comments.'' \41\ A.O. Smith reiterated its comments submitted in 
response to the August 2016 SNOPR.\42\ Throughout the July 2023 NOPR 
TSD, DOE notes that for most of the product classes being converted, 
there are currently no models on the market, and therefore it did not 
use test data to adjust its analytical model. However, there are 
products on the market that comport to several of the product classes 
for which DOE has proposed UEF energy conservation standard levels. 
(A.O. Smith, No. 1182 at p. 11)
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    \41\ See 81 FR 96204, 96211.
    \42\ Found online at: www.regulations.gov/comment/EERE-2015-BT-TP-0007-0028.
---------------------------------------------------------------------------

    In the August 2016 Conversion Factor SNOPR, DOE explained that it 
had considered the applicability of standards to the products which 
eventually did not receive UEF-based standards because these products 
were not considered in DOE's rulemakings that culminated in the April 
16, 2010 and January 17, 2001 final rules (75 FR 20112 and 66 FR 4474, 
respectively), and accordingly, the standards adopted in those final 
rules are not applicable to these products. 81 FR 59736, 59742. Hence, 
the statutory EF-based standards were deemed most applicable to these 
product classes. Id. A.O. Smith generally raised the concern of needing 
test data to validate the converted standards when responding to the 
August 2016 Conversion Factor SNOPR, but did not explicitly indicate 
that the conversion equations were incorrect for the products which did 
not get converted. Rather, A.O. Smith had iterated that it was 
inappropriate at the time to establish standards without the basis of a 
test procedure that covered the sizes of water heaters in question. 
(A.O. Smith, EERE-2015-BT-TP-0007-0028 at pp. 2-3) As of the June 2023 
TP Final Rule, the appendix E test procedure does cover all of the

[[Page 37844]]

consumer water heaters being addressed in this analysis, and it is 
clearly established which EF-based standards do apply to these 
products.
    Rheem supported DOE's methodology to conduct the EF to UEF 
crosswalk for electric storage water heaters and gas-fired storage 
water heaters that currently do not have UEF-based standards. (Rheem, 
No. 1177 at p. 9-11) Other commenters requested that DOE publish data 
to demonstrate that the crosswalk results in appropriate standards 
compared to how these products would be rated if tested to the UEF test 
procedure.
    A.O. Smith emphasized that DOE must have test data to demonstrate 
that the crosswalked UEF standards are achievable by products on the 
market today, especially for very small electric storage water heaters, 
where there are several models on the market. A.O. Smith noted that 
previous experience with test procedure changeovers has shown that new 
test methods and test metrics impact water heaters differently and 
often unpredictably depending upon their specific attributes. The 
commenter indicated that it conducted its own testing and provided a 
limit set of results showing that very small electric storage water 
heaters could pass the crosswalked standards at a normal temperature 
setpoint. (A.O. Smith, No. 1182 at pp. 11-12)
    NYSERDA noted that the crosswalked product classes begin with the 
statutory EF standards, which result in the converted standards being 
significantly lower than those proposed for products with current UEF 
standards. (NYSERDA, No. 1192 at pp. 4-5) NYSERDA commented that, when 
the conversion factors were developed, these equations did not apply to 
the products that DOE is crosswalking to UEF standards in this 
rulemaking. (NYSERDA, No. 1192 at p. 5) Additionally, NYSERDA stated 
that the conversion factors were developed using rated storage volume; 
therefore the converted standards should be in rated storage volume 
also (instead of effective storage volume). (NYSERDA, No. 1192 at p. 5) 
NYSERDA recommended two approaches for setting standards for the 
product classes where there are no current models: a first option would 
be to test similarly sized products that do exist on the market; 
otherwise, the volume thresholds can be removed. NYSERDA commented that 
if DOE determines that these converted standards require additional 
analysis, it could simply clarify in the final rule that these products 
are still subject to the statutory EF standards and continue to rely on 
the waiver process to accommodate any products introduced within these 
categories; however, the commenter still encouraged DOE to further 
examine the converted EF standards. (NYSERDA, No. 1192 at p. 5)
    Bosch stated there is insufficient information to fully justify the 
proposed converted UEF values for the very small electric storage water 
heater product class, adding that the 2016 Conversion Factor Final Rule 
was not originally intended for this product group. Bosch requested DOE 
release its analysis of the efficiency testing conducted on the 17 
models in this product class, as there are significant differences 
between tanks and element types within this product class. (Bosch, No. 
1204 at pp. 3-4)
    BWC expressed concerns regarding the EF-to-UEF crosswalk DOE has 
analyzed in this rulemaking. BWC stated that using the December 2016 
Conversion Factor Final Rule equations to establish UEF-based standards 
for these products is not appropriate because these products were never 
subjected to the EF test procedure, and that DOE's approach in the 
March 2022 Preliminary Analysis and July 2023 NOPR could set an 
improper baseline. (BWC, No. 1164 at p. 10)
    As discussed in the July 2023 NOPR TSD, DOE conducted its own 
testing to verify that products on the market, when tested to the 
appendix E test procedure, would comply with the crosswalked standards. 
In response to the numerous requests for additional test data, DOE has 
published the results of the testing in chapter 5 of the final rule 
TSD. Additionally, DOE notes that A.O. Smith's test data also indicates 
that the standards are achievable (so long as the high temperature test 
is not used, which results in lower ratings). As discussed in section 
V.D.1 of this document, DOE has determined not to subject very small 
electric storage water heaters to high temperature testing; therefore, 
this would not be expected to reduce their UEF to a level below the 
adopted standards.
    DOE notes that during the 2016 Conversion Factor rulemaking, it 
conducted testing of 55 consumer storage water heaters and 22 consumer 
instantaneous water heaters to validate the conversion factors used to 
determine the UEF-based standards DOE is establishing in this 
rulemaking. In addition, AHRI provided data for 130 consumer storage 
water heaters and 36 consumer instantaneous water heaters using both EF 
and UEF test procedures.\43\ 81 FR 96204, 96214-96216. DOE concluded 
that these conversion factors resulted in UEF-based standards that were 
neither more nor less stringent than the equivalent EF-based standards. 
81 FR 96204, 96207.
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    \43\ Data for consumer water heaters tested during the 
development of the 2016 Conversion Factor Final Rule were reported 
in an SNOPR published in the Federal Register on August 30, 2016. 81 
FR 59736.
---------------------------------------------------------------------------

    Rheem supported the translated UEF standards for very small 
electric storage water heaters, but recommended that DOE remove the 
high draw and medium draw pattern standards for very small electric 
storage water heaters because these levels are generally not achievable 
or necessary. (Rheem, No. 1177 at p. 9)
    Removing the high and medium draw pattern standards for very small 
electric storage water heaters would result in a gap in coverage of 
standards, however, should products meeting this description become 
available in the future. Therefore, DOE is maintaining its approach to 
adopt standards for each draw pattern for very small electric storage 
water heaters. Should more data become available after this rulemaking, 
DOE may consider consolidating standards for different draw patterns if 
it can be determined conclusively that the medium and high draw pattern 
standards are not justified.
    Rheem added further that reducing the crosswalked electric 
instantaneous water heater standards to align with those for very small 
electric storage water heaters would reduce manufacturer burden and 
design costs. (Rheem, No. 1177 at pp. 13-14)
    While DOE acknowledges that electric instantaneous water heaters 
and very small electric storage water heaters may be installed in 
similar applications, as discussed in section IV.A.1.c of this 
document, storage-type and instantaneous-type water heaters generally 
have differences in operation that can lead to different utilities. 
Hence, DOE is maintaining its approach to treat these as separate 
product classes and evaluate standards separately.
    BWC provided that it did not believe an approach that relied on a 
market analysis of currently listed models, along with an efficiency 
level and design option (teardown) analysis, was appropriate for these 
product classes that did not previously have a minimum efficiency 
standard. BWC stated that accounting for the stored water temperature 
and rated storage volume largely influence a product's efficiency 
rating, but there are other factors that can strongly influence the 
UEF, such as insulation thickness (for electric-type storage water 
heaters) and modulating controls (for instantaneous water

[[Page 37845]]

heaters). BWC thus requested DOE to docket the analysis conducted to 
establish the new minimum UEF levels for these product classes. (BWC, 
No. 1164 at p. 10)
    For this final rule DOE maintains its approach for converting 
standards from EF to UEF. EPCA directed DOE to establish a uniform 
efficiency descriptor to be used to regulate all covered water heaters, 
with certain exceptions for water heaters used only in commercial 
applications. (42 U.S.C. 6295I(5)) Therefore, DOE has conducted this 
analysis in satisfaction of its statutory obligation to delineate 
standards for all consumer water heaters in terms of UEF. The statute 
provides that, in the case of a test procedure or metric change, DOE 
must determine what equivalent standards are on the basis of the new 
test procedure or metric. (42 U.S.C. 6293(e)(2)) The conversion factor 
calculations serve to accomplish this purpose. Because the UEF-based 
standards for these product classes reflect the same stringency as the 
statutory EF-based standards that are currently applicable--i.e., these 
are not standards that would require higher efficiency to comply-- it 
is not necessary for DOE to conduct an assessment of energy savings or 
economic justification prior to proposing such standards. The 
Department believes that BWC may have misinterpreted the analysis for 
product classes with current UEF-based standards as also applying to 
these product classes which have EF-based standards. To reiterate, 
these standards are not being established pursuant to EPCA provisions 
at 42 U.S.C. 6295(o)(A), but instead in accordance with those at 42 
U.S.C. 6293(e)(2). Additionally, the statutory EF-based standards are 
provided within EPCA and do not require separate justification to adopt 
these stringencies.
b. Consideration of More Stringent Standards
    DOE also requested information and data regarding the UEF of 
products within these product classes if they are found to generally 
exceed the proposed levels. 88 FR 49058, 49100.
    BWC supported DOE's tentative determination not to propose more 
stringent standards for product classes that are currently covered by 
the statutory EF-based standards because these product classes have low 
market share and would present limited opportunity for energy savings. 
(BWC, No. 1164 at p. 3)
    Rheem commented that there may be no or very few water heaters on 
the market in the volume ranges for which crosswalked standards were 
proposed for gas-fired storage water heaters and therefore did not 
support more stringent standards for these sizes of gas-fired storage 
water heaters. (Rheem, No. 1177 at p. 11)
    Rheem recommended against increasing the >120-gallon standards for 
electric storage water heaters to a level that would require heat pump 
technology because ASME tank construction is required for water heaters 
with a measured volume >120 gallons, significantly increasing the cost 
of the water heater to the point where it is not a low-cost replacement 
for a heat pump water heater. (Rheem, No. 1177 at p. 10) However, Rheem 
recommended increasing the energy conservation standards for <20-gallon 
tabletop water heaters to the levels proposed for >=20-gallon tabletop 
water heaters and simplifying the energy conservation standards table. 
(Rheem, No. 1177 at p. 10)
    In general, while there are few (or sometimes no) models on the 
market that fall within these product classes, comments received in 
response to the July 2023 NOPR suggested that, within the 5-year 
compliance period of this final rule, manufacturers would be 
incentivized to develop new models in these product classes in lieu of 
developing designs for product classes with current UEF-based standards 
that have to comply with more stringent standards. Based on the 
comments, which are summarized in the following paragraphs, DOE 
understands that this is possible if the design changes required to 
transfer an existing model to a product class without current UEF-based 
standards are less expensive than the design changes required to 
increase the efficiency of that model to meet the amended standard for 
the product class with a current UEF-based standard. Commenters 
provided feedback on whether or not more stringent standards were 
justified based on whether or not the product class could be used to 
``circumvent'' other standards for similar product classes that have 
higher standards.
    A.O. Smith indicated that simultaneous establishment of baseline 
UEF levels for converted product classes while increasing the 
efficiency levels for existing product classes creates a scenario where 
new products may emerge, and shipments may shift from product classes 
with more stringent standards to very similar products in new product 
classes with less stringent standards. (A.O. Smith, No. 1182 at p. 14)
    DOE does not currently possess data supporting more stringent 
standards than those being established as part of this rulemaking. 
However, DOE may conduct a separate rulemaking to determine the 
benefits and burdens of higher standards for these products at a later 
time. For example, after the compliance date of this final rule, the 
availability of certifications of UEF may enable DOE to consider more 
stringent standards in a future rulemaking.
    A.O. Smith provided some test data for very small electric storage 
water heaters showing that these products would not pass the proposed 
standards when tested to the high temperature test method, and thus 
recommended that very small electric storage water heaters be exempt 
from the high temperature test method. A.O. Smith stated that this test 
method would not be representative of an average use cycle for very 
small electric storage water heaters, and the company would rather 
dedicate its engineering resources toward the development of future 
heat pump offerings rather than redesigning existing product lines for 
modest efficiency gains resulting from overlapping test procedure 
changeovers. A.O. Smith recommended DOE test baseline very small and 
small electric storage water heaters according to the proposed test 
procedure to ensure that crosswalked standards do not result in a 
stringency increase. (A.O. Smith, No. 1182 at pp. 11-12)
    Rheem recommended against setting a standard for very small 
electric storage water heaters at any higher stringency because a 
forced redesign for these products may not be necessary and would 
divert manufacturers' resources away from the heat pump water heater 
innovation. (Rheem, No. 1177 at p. 9)
    DOE understands that, if the high temperature test method were to 
apply to very small electric storage water heaters, then that test 
method would result in lower efficiency ratings for these products, and 
these lower ratings would not comply with the crosswalked standards. 
Therefore, manufacturers would have to redesign very small electric 
storage water heaters to be more efficient in order to comply with the 
standards that resulted from the EF-to-UEF crosswalk, and this would 
effectively constitute an increase in stringency of standards for these 
products. In section V.D.1.c of this document, DOE explains its 
determination to exempt very small electric storage water heaters from 
the high temperature test. As a result, there would be no increase to 
stringency for these products.

[[Page 37846]]

c. Circulating Water Heaters
    Prior to the publication of the June 2023 TP Final Rule, the test 
procedure did not provide sufficient clarity regarding how circulating 
water heaters 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. As 
discussed previously in section IV.A.1.a of this document, DOE is 
classifying circulating water heaters as storage-type water heaters 
subject to the storage water heaters standards. In the July 2023 NOPR, 
however, DOE considered circulating water heaters as instantaneous 
water heaters and developed proposed standards using the instantaneous 
water heater efficiency levels as a starting point.
    In response to the levels proposed in the July 2023 NOPR, NYSERDA 
suggested that DOE could address more stringent, heat pump-level 
standards for electric circulating water heaters in a separate 
rulemaking to ensure that the energy savings from this rulemaking are 
realized. (NYSERDA, No. 1192 at p. 7)
    BWC requested clarification on how DOE derived the minimum 
efficiency levels for electric circulating water heaters in the NOPR, 
noting that the efficiencies corresponded to electric resistance 
technology, not heat pump circulating water heaters. (BWC, No. 1164 at 
pp. 2-3)
    As discussed in section IV.A.1.a of this document, circulating 
water heaters will be subject to the applicable standards for storage-
type water heaters. As such, there is no separate analysis to address 
UEF-based standards for circulating water heaters in this final rule.
    In response to the December 2023 SNOPR proposing to treat 
circulating water heaters as part of the storage-type water heater 
product classes, BWC claimed that establishing heat pump-level 
standards for electric circulating water heaters would be inappropriate 
because they would favor one design option over another, as heat pump 
water heaters are not considered a separate product class from electric 
storage water heaters, stating that EPCA requires DOE to determine 
standards without regards to the technologies utilized by manufacturers 
or preferred by consumers. BWC requested that DOE clarify its 
understanding of its authority under EPCA with respect to these 
standards. (BWC, No. 1413 at pp. 2-3)
    DOE notes that the analysis conducted in this rulemaking has 
determined that the amended standards for electric storage water 
heaters (which include electric circulating water heaters) are both 
technologically feasible and economically justified, and result in 
significant savings. These conclusions are discussed in detail in 
section V.C.1 of this document. DOE uses the screening criteria found 
in sections 6(b)(3) and 7(b) of appendix A to 10 CFR part 430, subpart 
C to determine which technology options are suitable for further 
consideration in an energy conservation standards rulemaking. Under the 
criteria for technological feasibility, DOE considers technologies 
incorporated in commercially-available products or in working 
prototypes to be technologically feasible. As such, EPCA does not 
prohibit DOE from establishing a standard that can only be met through 
the use of a certain technology. Heat pump technology is the only 
technology available to allow electric circulating water heaters to 
achieve higher efficiency levels. DOE is not establishing a 
prescriptive design requirement that electric circulating water heaters 
must implement heat pump technology.
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 \44\ 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 final rule TSD for additional detail on the manufacturer markup.
---------------------------------------------------------------------------

    \44\ U.S. Securities and Exchange Commission. Company Filings. 
Available atwww.sec.gov/edgar/searchedgar/companysearch.html (last 
accessed December 1, 2023).
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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. 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 final rule TSD for a more detailed 
discussion about parties in the distribution chain.
    For this final rule, DOE characterized how consumer water heater 
products pass from the manufacturer to residential and commercial 
consumers \45\ by gathering data from several sources, including 
consultant reports (available in appendix 6A of the final rule TSD), 
the 2023 BRG report,\46\ and the 2022 Clear Seas Research Water Heater 
contractor survey \47\ to determine the distribution channels and 
fraction of shipments going through each distribution channel. The 
distribution channels for replacement or new owners of consumer water 
heaters in residential applications (not including mobile homes) are 
characterized as follows: \48\
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    \45\ DOE estimates that 2 percent of gas-fired storage heaters 
(``GSWHs''), 29 percent of oil-fired storage water heaters 
(``OSWHs''), and 9 percent of electric storage water heaters 
(``ESWHs'') will be shipped to commercial applications in 2030.
    \46\ BRG Building Solutions, The North American Heating & 
Cooling Product Markets (2023 Edition). Available at 
www.brgbuildingsolutions.com/reports-insights (last accessed 
December 1, 2023).
    \47\ Clear Seas Research, 2022 Mechanical System--Water Heater. 
Available at clearseasresearch.com/reports/industries/mechanical-systems/ (last accessed December 1, 2023).
    \48\ 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, and 45 percent 
of the time for ESWHs; directly form the retailer 45 percent of the 
time for GSWHs, 5 percent of the time for OSWHs, and 50 percent of 
the time for ESWHs, and retailer/contractor 5 percent of the time 
for GSWHs, OSWHs, and ESWHs.

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 
dealers/retail outlets that then sell to the customer.\49\
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    \49\ 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, 
and 5 percent of the time for ESWHs; directly form the retailer 10 
percent of the time for GSWHs, 5 percent of the time for OSWHs, and 
25 percent of the time for ESWHs; retailer/contractor 5 percent of 
the time for GSWHs, OSWHs, and ESWHs; and directly through mobile 
home retailer 80 percent of the time for GSWHs, 0 percent of the 
time for OSWHs, and 65 percent of the time for ESWHs.

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[[Page 37847]]

    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 \50\ in residential applications (not 
including mobile homes) are characterized as follows: \51\
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    \50\ DOE estimates that in the residential market 10 percent of 
GSWHs, 2 percent of OSWHs, and 15 percent of ESWHs will be shipped 
to new construction applications in 2030.
    \51\ 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 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.\52\
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    \52\ 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.
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    To estimate average baseline and incremental markups, DOE relied on 
several sources, including: (1) form 10-K \53\ 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); \54\ (3) U.S. Census Bureau 2017 Economic Census data \55\ 
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 \56\ (for wholesalers). DOE assumes that the markups 
for national accounts 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 \57\ 
to disaggregate the mechanical contractor markups into replacement and 
new construction markets for consumer water heaters used in commercial 
applications.
---------------------------------------------------------------------------

    \53\ U.S. Securities and Exchange Commission. Company Filings. 
Available atwww.sec.gov/edgar/searchedgar/companysearch.html (last 
accessed December 1, 2023).
    \54\ U.S. Census Bureau, 2017 Annual Retail Trade Report, 
available at www.census.gov/programs-surveys/arts.html (last 
accessed December 1, 2023). Note that the 2017 Annual Retail Trade 
Report is the latest version of the report that includes detailed 
operating expenses data.
    \55\ U.S. Census Bureau, 2017 Economic Census Data. available at 
www.census.gov/programs-surveys/economic-census.html (last accessed 
December 1, 2023). Note that the 2017 Economic Census Data is the 
latest version of this data.
    \56\ U.S. Census Bureau, 2017 Annual Wholesale Trade Report. 
available at www.census.gov/wholesale/index.html (last accessed 
December 1, 2023). Note that the 2017 AWTR Census Data is the latest 
version of this data.
    \57\ Air Conditioning Contractors of America (``ACCA''), 
Financial Analysis for the HVACR Contracting Industry (2005), 
available at www.acca.org/store#/storefront (last accessed December 
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.
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    PHCC commented that DOE's approach of incremental markups is not 
representative of how contractors set markups. PHCC commented that 
contractors know the required profit margin and set markups 
accordingly, rather than determining a markup for a baseline product 
and deciding a lower appropriate markup based on additional costs due 
to increased standards. (PHCC, No. 1151 at pp. 5-6) Rheem agreed that 
DOE's estimates of manufacturers' production costs for electric 
resistance and heat pump water heaters appear reasonable and that the 
retail price for electric resistance water heaters is accurate but the 
retail price of heat pump water heaters is a little low. Rheem 
recommended reviewing incremental markups for heat pump water heaters. 
Rheem also requested clarification on whether incremental markups are 
current markups or estimated for the compliance date of the rulemaking. 
(Rheem, No. 1177 at pp. 8-9)
    In response, the development of all markup values is based on the 
most current data available, representing current markups applied to 
the products. The markups analysis is intended to represent products 
sold and installed at higher volume, since such products become the new 
baseline efficiency in the standards cases. Comparisons to current 
retail prices are therefore not necessarily applicable if such products 
are not common, high-volume products. For example, heat pump water 
heaters currently have a small market share and have higher profit 
margins. In a standards case with heat pump water heaters as the new 
baseline efficiency, their markups will be more representative of high-
volume products. DOE also acknowledges that the contractor and customer 
relationship is of value and hence assigns contractors as an active 
market participant for a major portion of its distribution channels. 
For contractor markups, DOE utilized the 2017 Economic Census data, the 
latest data source consisting of the detailed operating costs needed to 
derive incremental markups. DOE believes that while contractors are 
unlikely to directly estimate an incremental markup in response to the 
cost change due to efficiency standards, contractor behavior is 
consistent with the characterization of DOE's markup approach which 
results in lower overall markup than baseline markup. DOE does not mean 
to suggest that contractors will directly adjust their markups on 
equipment if the price they pay goes up as a result of appliance 
standards. Rather, the approach assumes that such adjustment will occur 
over a (relatively short) period of time as part of a business 
management process. In summary, DOE acknowledges that its approach to 
estimating distributor 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, it

[[Page 37848]]

continues to believe that its assumption that standards do not 
facilitate a sustainable increase in profitability is reasonable.
    In addition to the markups, DOE obtained State and local taxes from 
data provided by the Sales Tax Clearinghouse.\58\ 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.
---------------------------------------------------------------------------

    \58\ Sales Tax Clearinghouse Inc., State Sales Tax Rates Along 
with Combined Average City and County Rates (June 14, 2023). 
Available at www.thestc.com/STrates.stm) (last accessed December 1, 
2023).
---------------------------------------------------------------------------

    In response to the July 2023 NOPR, AHRI advised that DOE's process 
should include industry participation by surveying manufacturers, 
distributors, and consumers and DOE should conduct another round of 
confidential interviews with manufacturers and reevaluate based on 
those interviews. (AHRI, No. 1167 at p. 11)
    In support of the July 2023 NOPR, DOE conducted confidential 
interviews with OEMs representing approximately 80 percent of domestic 
industry consumer water heater shipments. In those interviews, DOE 
requested information about a range of topics including distribution 
channels. See appendix 12-A of the final rule TSD for a copy of the 
manufacturer interview guide. DOE also conducted confidential 
interviews with consumer water heater OEMs in support of the March 2022 
Preliminary Analysis. Data collected through this process was recent 
and sufficient to conduct the analysis given that market conditions 
have remained largely the same since those confidential interviews. 
Chapter 6 of the final rule TSD provides details on DOE's development 
of markups for consumer water heaters.

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 heater 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.
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'') in the July 2023 NOPR, which was the most recent such survey 
that was then fully available.\59\ The 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 that 
were built after 2000.
---------------------------------------------------------------------------

    \59\ Energy Information Administration (``EIA''), 2015 
Residential Energy Consumption Survey (``RECS''). Available at 
www.eia.gov/consumption/residential/ (last accessed December 1, 
2023).
---------------------------------------------------------------------------

    In response to the July 2023 NOPR, Gas Association Commenters, 
Essency, Rinnai, and Atmos Energy commented that RECS 2015 should not 
have been used for the analysis and therefore the entire analysis is 
flawed. Gas Association Commenters stated that DOE had plenty of time 
to use RECS 2020 data and chose not to make their results look better. 
(Gas Association Commenters, No. 1181 at p. 32; Essency, No. 1194 at p. 
3; Atmos Energy, No. 1183 at pp. 5-6; Rinnai, No. 1186 at p. 33) 
NYSERDA supported DOE's analysis, including RECS data and the consumer 
choice model analysis methodology. (NYSERDA, No. 1192 at pp. 3-4)
    In response, DOE notes that RECS 2020 published finalized microdata 
in June 2023, with further updates published in July and September 
2023. When conducting the analysis for the NOPR, the full set of 
microdata was not available. For this final rule, however, DOE 
incorporated RECS 2020 as the basis of the building sample development 
and updated the analyses accordingly.\60\ DOE agrees that incorporating 
RECS 2020 improves the representativeness of the residential building 
sample as RECS 2020 brings a threefold increase in sample size compared 
to RECS 2015.\61\ A larger sample size generally results in smaller 
standard errors, especially for estimates of smaller subpopulations. In 
this final rule, DOE maintains a similar methodology in sample 
development for the analyzed product classes. The details of selection 
criteria and the resulting sample size for each product class are 
presented in the final rule TSD (see chapter 7 and appendix 7A).
---------------------------------------------------------------------------

    \60\ Energy Information Administration (``EIA''), 2020 
Residential Energy Consumption Survey (``RECS''). Available at 
www.eia.gov/consumption/residential/ (last accessed December 1, 
2023).
    \61\ According to published data and EIA website, RECS 2020 is 
based upon responses collected from in total 18,496 households which 
is three times greater than 5,686 respondents in RECS 2015.
---------------------------------------------------------------------------

    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.\62\ DOE has maintained its 
sample development methodology used in July 2023 NOPR for consumer 
water heaters used in commercial applications.
---------------------------------------------------------------------------

    \62\ 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 Dec. 1, 2023).
---------------------------------------------------------------------------

2. Hot Water Use Determination
    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 the size bin of the water 
heater (30 gallons and less, 31 to 49 gallons, and 50 gallons and 
more); for each commercial building, DOE assumes that the water heater 
generally falls under the biggest size option applicable for each 
product class. For each size bin, DOE derived the fraction of models 
falling under each draw patterns and assigns the sampled water heater 
to an appropriate one (i.e., low, medium, and high). A specific tank 
size is then assigned based on the size bin and the draw pattern from 
the typical water heater sizes. Typical water heater sizes are the most 
common sizes for each product class and have the minimum energy factor 
allowed by current energy conservation standards.

[[Page 37849]]

They are 30, 40, and 50 gallon for gas and electric storage water 
heaters, 30 and 50 gallon for oil, and 60 and 75 gallon for electric 
storage water heaters larger than 55 gallons. For the product class of 
ESWHs smaller than 35 gallons, DOE also assigned a fraction the tank 
size of 35 gallons. These sizes are referred to as ``standard'' sizes. 
Finally, DOE calculated the hot water use for each household and 
building based on the characteristics of the water heater and the 
reported water heating energy use.
    In order to disaggregate the selected sampled water heaters into 
draw patterns and standard sizes, 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 CCD \63\ and AHRI 
certification directory \64\ together with other publicly available 
data from manufacturers' catalogs of consumer water heaters. For all 
product classes, DOE used disaggregated shipments data by rated volume 
from BRG Building Solutions 2023 report from 2007 to 2022 \65\ and data 
from U.S. Census Bureau data (2003-2008).\66\ Finally to determine the 
appropriate product type and size for different applications, DOE used 
manufacturer-produced consumer water heater sizing guidelines and 
calculators.
---------------------------------------------------------------------------

    \63\ U.S. Department of Energy's Compliance Certification 
Database is available at regulations.doe.gov/certification-data 
(last accessed December 1, 2023).
    \64\ Air Conditioning Heating and Refrigeration Institute. 
Consumer's Directory of Certified Efficiency Ratings for Heating and 
Water Heating Equipment. December 1, 2023. (Available at 
www.ahridirectory.org) (last accessed December 1, 2023).
    \65\ BRG Building Solutions. The North American Heating & 
Cooling Product Markets (2023 Edition). 2023.
    \66\ U.S. Census Bureau. Current Industrial Reports for Major 
Household Appliances 2003-2008. Washington, DC Report No. MA335F.
---------------------------------------------------------------------------

    AHRI recommended DOE explain its inputs in the energy use 
calculations. AHRI commented that DOE's use of nesting of various 
assumptions for residential water heaters leads to unlikely results 
that DOE does not, or cannot, explain. (AHRI, No. 1167 at p. 19) AHRI 
also asked why DOE has not accepted the suggestion by AHRI and others 
to use median, not the mean values for consumption and LCC savings to 
avoid the effects of these outliers and to alleviate, at least in part, 
the deficiencies of its base case random assignment issue. (AHRI, No. 
1167 at p. 20)
    In response, DOE notes that RECS data provides the information on 
the household size and water heating energy use. RECS is the most 
comprehensive, nationally-representative, and robust data source on 
household energy consumption available to DOE. In general, DOE has 
found that the weighted average energy use for water heating correlates 
with the size of the household, i.e., the reported number of people in 
that household. Greater energy expenditure on water heating largely 
falls into the bins of households of larger sizes (4 people and above). 
The hot water use derived based on the water heating energy use follows 
similar pattern (see chapter 7 of the final rule TSD for the 
calculation of hot water use). When reporting the distribution of the 
derived hot water use, DOE takes into account both consumer water 
heaters in residential as well as consumer water heaters used in 
commercial applications and close to 40 percent of the top 5 percent of 
water consuming sample buildings/households are commercial applications 
which generally have higher upper bound of hot water use. These outlier 
data points therefore represent either data directly reported from RECS 
for larger households or commercial applications using consumer water 
heaters, both of which represent real-world usage. In addition, DOE 
evaluates each sampled building/household individually by calculating 
its hot water use and the corresponding cost efficiency thereafter and 
that DOE believes the average LCC savings as reported is a good 
representation of the aggregated national values. Nevertheless, the LCC 
spreadsheet includes a calculation of median LCC savings, as well as 
LCC savings at various percentiles. Even if DOE were to rely on the 
median LCC savings instead of the mean LCC savings, DOE's conclusion of 
economic justification would remain the same.
    Gas Association Commenters argued that water consumption should be 
based on household size and that there are problems with water 
consumption calculations. Gas Association Commenters argue the model 
results in unrealistic outliers for smaller households reaching 
consumption levels equivalent to space heating. Gas Association 
Commenters argue that a potential reason for this failure is how the 
model calculates daily water usage. For example, Gas Association 
Commenters argued that in DOE's model, some single person households 
use 200-350 gallons a day which is far from reasonable (4-7 baths of 
water a day every day of the year). Gas Association Commenters argued 
that Draw Pattern ID is based on randomly assigned distribution. Gas 
Association Commenters argue that for small storage units, there is a 5 
percent chance of a large draw pattern Gas Association Commenters 
argues that a better solution would be to use the test procedure for 
water heaters as a basis for modeling energy usage rather than assuming 
draw rates based on the size of the original equipment in RECS. (Gas 
Association Commenters, No. 1181 at pp. 25-31) Rinnai argued that hot 
water usage should be determined through less opaque methods than the 
current method. Rinnai stated that rather than using RECS data to 
determine water usage, DOE should use test procedure defined hot water 
usage rates for comparisons of ELs. Rinnai stated that they believe 
that doing so would provide clearer consistency in comparison of 
residential water heater technologies generally and for EL comparison 
for proposed efficiency thresholds. Rinnai also stated that this would 
make DOE's analysis more consistent with other federal rating programs 
such as the FTC energy guide labeling program. (Rinnai, No. 1186 at p. 
26 and p. 33) Furthermore, Rinnai commented that if RECS is to be used, 
RECS 2015 is outdated and RECS 2020 should be used for this analysis. 
(Rinnai, No. 1186 at p. 33) On the contrary, NEEA supported DOE's 
overall method of analysis using Monte Carlo simulations informed by 
RECS data. NEEA commented that the Monte Carlo approach can 
successfully represent the true distribution of water product classes, 
hot water use, energy use and costs and that NEEA uses a similar 
approach when conducting similar analysis. NEEA commented that RECS 
serves as a reliable national dataset that helps account for the 
diversity found in the water heater market. (NEEA, No. 1199 at p. 5)
    In response, for this final rule, DOE incorporated the latest RECS 
2020 data for its analyses. With the increased sample size and the most 
recent timeline of the fielding of the survey, DOE believes that it 
provides a sample pool of more up to date national representation of 
housing characteristics and energy consumption of the home appliances. 
As discussed previously, the weighted average of the energy use on 
water heating and the derived hot water use generally correlates with 
the size of the household with deviations that represent the real world 
complexities of the use of hot water heater in households of different 
types. DOE continues to rely on RECS as the basis of its analyses for 
its incomparable scope of coverage on housing

[[Page 37850]]

characteristics and energy consumption and believes that it is an 
objective reflection of the landscape in the national water heater 
market. In terms of the assignment of draw pattern, DOE derived the 
distribution of different draw patterns based on market research of the 
number of models in each bin that are available on the market. The 
breakdown can be found in chapter 7 of the final rule TSD.
    Ecotemp commented that the DOE consumer usage assumptions do not 
match the water use patterns of cabins, vacation homes, rental 
properties, or any other intermittent use dwelling. (Ecotemp, No. 1092 
at p. 2) In response, RECS does not include in the survey house types 
like vacant, seasonal, vacation homes and group quarters and thus DOE 
build its analysis around regular households. However, in both 
residential households (sample by RECS) and commercial buildings 
(CBECS) DOE has observed samples with lower than usual water heating 
energy use. As stated previously, DOE believes that RECS and CBECS 
provide a nationally representative sample pool that includes a variety 
of housing types.
3. 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.\67\ 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'').
---------------------------------------------------------------------------

    \67\ 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 
final rule TSD.
    The daily hot water draw volume is estimated based on the water 
heater energy use estimated from RECS 2020 and CBECS 2018. The inlet 
water temperature is based on weather station temperature data and RECS 
2020 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. These fractions 
vary significantly by region and type of home, and match 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 chapter 7 and appendix 8D (installation costs) of the 
final rule TSD for more details about the installation location 
methodology and ambient temperature methodology.
    ONE Gas commented that DOE responded that it uses test procedure 
energy descriptor performance to determine energy use that is then 
``convert[ed] . . . to field energy use using modified WHAM 
equations,'' but ONE Gas's review of these procedures as found in 
appendix 7B of the Preliminary Analysis TSD suggests that the energy 
consumption estimates modeled do not meet the intent of the NASEM peer 
review, and DOE's response is effectively incomplete. ONE Gas 
recommended that DOE (1) use the test procedure assumptions of hot 
water consumption (based on the UEF draw patterns for residential water 
heating products) as the basis for comparing efficiency levels and 
alternatives for minimum efficiency standards, and (2) use WHAM 
calculations or other methods for scaling up efficiency level savings 
for the forecasted market under the ELs analyzed. (ONE Gas, No. 1200 at 
p. 9) In response, the appendix 7B in Preliminary Analysis TSD was 
merged in chapter 7 in NOPR TSD. Cross-reference pointing to appendix 
7B for the energy use methodology in the TSD in the July 2023 NOPR was 
a typo DOE now has corrected. Description of the use of WHAM can be 
found in chapter 7 of the final rule TSD. As discussed in section 
IV.E.2 of this document, DOE determines that calculating the hot water 
use based on RECS reports presents a representative distribution of 
real world energy consumption and the use of WHAM equation is essential 
for translating energy consumption into hot water use. DOE maintains 
its methodology in this final rule to use RECS-reported water heating 
energy use and WHAM equation to calculate the corresponding energy use 
for each efficiency level of each product classed for sampled 
households/buildings.
    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 
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. In response to the July 2023 NOPR, Essency noted that the 
energy consumption model used in the analysis utilizes a recovery 
efficiency model that is too simplified and overestimated. They stated 
that the recovery efficiency model is a quadratic function with a 
minimum temperature of roughly 45 [deg]F-50 [deg]F which gives it a 
recovery efficiency at 37 [deg]F, which Essency commented is a 
temperature where most of the current heat pump water heaters are 
working with electric resistance only. Essency also commented that the 
energy removed from the air is deducted in warmer months but this 
energy is not considered for cold months where the energy is removed 
from a heated space, which Essency asserted creates a bias in the 
published efficiency of heat pump water heaters. Essency also commented 
that the surrounding air temperature was used to calculate the 
efficiency of the heat pump even in the ducted configuration. (Essency, 
No. 1194 at p. 2) Armada argued that the energy savings are only 
realized under specific space and climate conditions, and

[[Page 37851]]

deviations from these ideal conditions diminish the efficiency of a 
heat pump water heater. Armada noted that many heat pump water heaters 
have back up electric resistance heating, and when these space and 
climate conditions are not met, the water heater will utilize 
resistance heating--all of the cost of a heat pump with none of the 
anticipated benefits. (Armada, No. 1193 at pp. 5-6) NRECA commented 
that stakeholders in cold climates are concerned about the 
effectiveness of heat pump water heaters during extreme cold events. In 
cold climates, and particularly during extreme cold events, heat pump 
water heater in garages or other unconditioned spaces would operate 
electric resistive heating elements for a large portion of the day, 
resulting in high energy use and reducing LCC savings. NRECA commented 
that cooperatives such as Agralite Electric Cooperative in Minnesota 
and Iowa Lakes Electric Cooperative in Iowa expressed concerns related 
to the energy the heat pump water heater removes from the home if 
installed in the conditioned space. Because the heat pump water heater 
draws its energy from the air in the home, the space heating system 
must resupply heat taken up by the heat pump water heater. (NRECA, No. 
1127 at p. 12)
    In response, DOE notes that the analyses account for the energy 
consumption when the heat pump water heater is operating on 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. As Essency 
noted, DOE adjusts the recovery efficiency in a quadratic function to 
account for the changes in performance of the heat pump under different 
conditions. DOE slightly updated the adjustment function for this final 
rule so that when below 32 [deg]F and above 100 [deg]F the electric 
resistance mode is considered. DOE also modified the methodology to 
take into account the outdoor temperature in ducted setting per 
Essency's comment. 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. Lastly, because of the cooling effect heat pump water heater can 
have during heating season, DOE also estimated that two-thirds of heat 
extracted from the air by the heat pump water heater is replaced by the 
space conditioning system, which was taken in account for the heating 
season.
    Gas Association Commenters commented that there is a bug in the LCC 
tool that causes it to use only a single year of weather data rather 
than 10-year average. (Gas Association Commenters, No. 1181 at p. 34) 
In response, DOE notes that the analysis uses the NOAA's 30 year 
average weather data for the outside air temperature for all product 
classes.
    Chapter 7 of the final rule TSD provides details on DOE's energy 
use analysis for consumer water heaters.

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:
    [msqu] 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.
    [msqu] 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 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 samples from the RECS 2020 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, shipping costs, 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.
    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 heater user samples. 
For this rulemaking, the Monte Carlo approach is implemented in MS 
Excel together with the Crystal Ball\TM\ add-on.\68\ 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 (as 
shown in chapter 8 of the final rule TSD). In performing an iteration 
of the Monte Carlo simulation for a given consumer, product efficiency 
is chosen based on its probability. At

[[Page 37852]]

the high end of the range, if the chosen product efficiency is greater 
than or equal to the efficiency of the standard level under 
consideration, the LCC calculation reveals that the hypothetical 
consumer represented by that data point is not impacted by the standard 
level because that consumer is already purchasing a more-efficient 
product. At the low end of the range, if the chosen product efficiency 
is less than the efficiency of the standard level under consideration, 
the LCC calculation reveals that the hypothetical consumer represented 
by that data point is 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.
---------------------------------------------------------------------------

    \68\ 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 December 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 first year of 
required compliance with new or amended standards. New and amended 
standards 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(m)(4)(A)(ii)) Therefore, DOE used 2030 as the first full year of 
compliance with any amended standards for consumer water heaters.
    Table IV.25 summarizes the approach and data DOE used to derive 
inputs to the LCC and PBP calculations. The subsections 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 final rule TSD and its appendices.
BILLING CODE 6450-01-P
[GRAPHIC] [TIFF OMITTED] TR06MY24.040

BILLING CODE 6450-01-C
1. Product Cost
    To calculate consumer product costs, DOE multiplied the MSPs 
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.
    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.\69\
---------------------------------------------------------------------------

    \69\ 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

[[Page 37853]]

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 U.S. Bureau of Labor Statistics' 
(``BLS'').\70\ 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.
---------------------------------------------------------------------------

    \70\ 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. Given the uncertainty 
regarding the magnitude and direction of potential future price trends, 
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. However, DOE performed a 
sensitivity analysis utilizing both a decreasing and an increasing 
price trend (see appendix 8C). The relative comparison of potential 
standard levels remains the same regardless of which price trend is 
utilized and the conclusions of the analysis do not change.
    BWC requested that DOE detail its methods in utilizing price 
learning curves for both heat pump water heater and condensing gas 
products, as was indicated in Section IV(F)(1) of the July 2023 NOPR, 
so that stakeholders may review them. BWC suggested the additional 
components required to manufacture higher efficiency products required 
by this proposal, in addition to their more complex manufacturing 
processes, will continue to compel higher product costs than is 
currently expected of non-condensing gas and electric resistance water 
heaters common in the market today, economies of scale notwithstanding. 
(BWC No. 1164 at p. 17) The available data only allow estimation of 
price trends for water heaters as a group, not for different efficiency 
levels of water heaters. DOE agrees that the product costs of heat pump 
water heater and condensing gas products will continue to be higher 
than non-condensing gas and electric resistance water heaters. However, 
it is reasonable to expect that factors affecting water heaters as a 
whole, such as growing experience in production or changes in commodity 
prices, will affect all water heaters. Thus, for this final rule, it 
used the same price trend projection for all water heaters.
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 consumers 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 2020 and CBECS 2018. For this final rule, 
DOE used 2023 RSMeans data for the installation cost estimates, 
including labor costs.71 72 73 74 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 2020 data and CBECS 2018 data.
---------------------------------------------------------------------------

    \71\ RSMeans Company Inc., RSMeans Mechanical Cost Data. 
Kingston, MA (2023) (Available at: www.rsmeans.com/products/books/2022-cost-data-books) (Last accessed December 1, 2023).
    \72\ 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 
December 1, 2023).
    \73\ RSMeans Company Inc., RSMeans Plumbing Cost Data. Kingston, 
MA (2023) (Available at: www.rsmeans.com/products/books/2022-cost-data-books) (Last accessed December 1, 2023).
    \74\ RSMeans Company Inc., RSMeans Electrical Cost Data. 
Kingston, MA (2023) (Available at: www.rsmeans.com/products/books/2022-cost-data-books) (Last accessed December 1, 2023).
---------------------------------------------------------------------------

    PHCC stated that the costs calculated for the installation costs 
are too low. PHCC commented that the data source RSMeans is intended 
for larger contractor businesses and the data has not been properly 
adjusted for small businesses. PHCC noted a discrepancy in the water 
heater installation time between their RSMeans source and DOE's report. 
(PHCC, No. 1151 at p. 4) PHCC stated that the values listed in the 
overhead category for costs are not correct and questioned the 10% 
profit, believing it to be understated. PHCC commented that the 
overhead category will include office utilities and rent, support 
staff, supervisors, estimators, advertising, truck and tool acquisition 
expenses, fuel and maintenance, technician non-productive time and 
depreciation. PHCC estimated that vehicle and tooling can be 15% to 20% 
of a technician's hourly rate. PHCC commented that DOE's assumption of 
$27 per hour overhead for 1 residential plumber is too low. (PHCC, No. 
1151 at p. 5) In response, RSMeans is a reputable source for cost 
estimation and it provides the national average labor rate for 
different crew types as well as regional rates, regardless of business 
size. DOE acknowledges that some individual contractors may depart from 
cost estimates determined by RSMeans, however RSMeans remains the most 
comprehensive and nationally representative data source for contractor 
rates and costs. The RSMeans database includes tens of thousands of 
individual line items and cost engineers spend tens of thousands of 
hours validating these costs every year. Thousands of contractors rely 
on RSMeans to determine cost estimates.\75\ DOE adjust the labor rates 
for different regions based on where the sample household or building 
is located. In regards to PHCC's concern over the labor rate and 
overhead, DOE notes that the $27 per hour overhead for a residential 
plumber is pointing to 63% markup compared to the bare hourly rate. 
Taking into account regional difference, the exact

[[Page 37854]]

dollar value of the markup increases for regions with labor rates 
higher than national average. For this final rule, DOE maintained the 
method of calculating labor rates as used in the July 2023 NOPR.
---------------------------------------------------------------------------

    \75\ See: www.rsmeans.com/info/contact/about-us (Last accessed 
March 6, 2024).
---------------------------------------------------------------------------

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.
    NMHC and NAA commented that in existing or future commercial-to-
residential conversions, by the nature of the building construction, 
historic building considerations or zero lot lines result in building 
facades that are frequently not available for vent terminations. They 
claimed that these buildings may be taller than a new residential 
building and existing structural frame geometries and shaft locations 
significantly influence dwelling unit configurations, in which cases 
new vent piping or condensate drains may need to traverse space outside 
of the affected dwelling unit to reach a building shaft with sufficient 
space to add piping. NMHC and NAA claimed that such piping runs will 
virtually always exceed the lengths cited for cost-analysis in the TSD 
and entail substantial additional costs unconsidered by DOE. (NMHC and 
NAA, No. 996 at p. 4) Gas Association Commenters argued that the 
installation cost did not address the breadth of existing multifamily 
configurations like high-rise, low-rise buildings, historic structures 
and adaptive reuse projects (i.e., commercial to residential 
conversions). (Gas Association Commenters, No. 1181 at p. 4) In 
response, DOE notes that current shipments of consumer water heaters to 
commercial buildings are small, approximately 5 percent of total 
shipments (see chapter 9 of final rule TSD). These are typically small 
offices, restaurants, or smaller retailers with similar hot water 
demand to residential households, otherwise they would be utilizing 
commercial water heating equipment outside the scope of this final 
rule. Any existing commercial-to-residential building conversions would 
be present in the CBECS 2018. Any future commercial-to-residential 
conversions are speculative at this time. Even if vent piping for gas-
fired water heaters were prohibitive for a given building, electric 
water heaters are available to supply hot water at lower cost to each 
individual unit, so there is no reason to expect substantially higher 
costs for these residential units. Their impacts would be very similar 
to those estimated for medium ESWH in new construction and/or multi-
family buildings and thus captured by the analysis. Furthermore, if the 
existing commercial building utilizes a central commercial boiler to 
supply hot water, DOE expects that such building conversions will take 
advantage of the existing central commercial boiler system to supply 
hot water to the newly built residential units. Also, in order to 
satisfy the building codes, these conversions typically require very 
extensive reconstructions including building new central shafts that 
accommodate all of the piping and vents related to plumbing, HVAC and 
water heating needs. These shafts could serve the condensation 
withdrawal as required for the heat pump water heaters or condensing 
gas water heaters. In regards to the length of the piping runs, DOE's 
analysis includes a distribution of a wide range of piping length which 
covers the additional piping requirements. Regarding existing multi-
family buildings, DOE clarifies that the analysis does include costs 
separately for multi-family buildings of various sizes (see appendix 
8D), and the RECS sample includes such multi-family buildings, 
therefore they are captured in the LCC analysis. The majority of multi-
family buildings utilize electric storage water heaters.
b. Gas-Fired and Oil-Fired Storage 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). DOE also takes into account that a fraction of 
installations would include adding tempering valves for water heaters 
with increased set-point temperatures due to the household preference. 
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 storage water heaters, additional costs included adding a new 
flue vent, combustion air intake 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 
storage 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.
    ONE Gas commented that venting costs are systematically under-
estimated but did not provide more data. ONE Gas argued that the 
Department does not provide illustrations of the full range of site 
conditions covered or confirmation data for its distributional data. 
(ONE Gas, No. 1200 at p. 10) ONE Gas argued that the Department uses a 
simplistic presumption of single-family household replacement 
installation requirements (e.g., venting into masonry chimneys, common 
venting with furnace) for multifamily households whose water heater 
vents atmospherically into a common vent shared with other households, 
which neglects various concerns. (ONE Gas, No. 1200 at p. 10) PHCC 
requested clarification on the language on page 8D-7 of the NOPR TSD 
surrounding masonry chimneys. PHCC commented that the language gets 
confusing as it discusses lined masonry chimneys but then considers 
metal lining systems. PHCC noted that masonry chimneys must be tile 
lined for gas venting and it is unclear if DOE views the use of a 
flexible metal liner kit as a lined chimney. Furthermore, PHCC 
indicated the need for more clarification on the use of flexible liners 
in chases, as those chases should contain metallic double wall vents. 
Finally, PHCC requested clarification on the discussion surrounding 
isolated water heaters that

[[Page 37855]]

are not gas-fired nor vented products, as PHCC is not clear on why they 
are called isolated and what their relationship is with common venting. 
(PHCC, No. 1151 at p. 3)
    In response, DOE notes that sources and references used in the 
analysis for deriving the methodology are presented in chapter 8 of the 
TSD and its appendices. DOE is aware that in some multifamily 
buildings, existing non-condensing storage water heaters of more than 
one unit can be commonly vented with other equipment vented using a 
Category I vent. In some cases, replacement of one water heater may 
require re-assessment of the shared vent path. However, this final rule 
does not require a condensing level for gas storage water heaters. DOE 
notes that it is challenging to acquire data on how frequently water 
heaters are commonly vented in multifamily buildings that allow DOE to 
statistically account for the cost impact on its own. DOE estimates, 
however, certain fractions by region where chimney venting is applied 
and believes that, besides those typical cases where chimney venting is 
shared by a water heater and a furnace, those installation cases have 
captured to some extent the costs applicable for vent path 
reassessment. In regards to the PHCC's comment on appendix 8D of NOPR 
TSD, to clarify, DOE accounts for different types of venting used in 
the field; venting through a masonry chimney and venting through a 
metal vent going through the roof are both included. For venting in the 
masonry chimney, DOE takes into account the cost for relining the 
chimney and venting for orphaned furnace/boiler where applicable in 
retrofits. Specifically, when venting through the chimney, DOE accounts 
for the cost of chimney re-lining and resizing of the vent connector 
should the retrofit require that. Additionally, ``isolated'' water 
heaters as explained in the documentation refer to water heaters that 
are not commonly vented or do not require venting at all, for which 
there are no common venting related costs considered. See chapter 8 and 
appendix 8D of the final rule TSD for details.
    CHPK stated that the modification associated with increasing 
insulation, the addition of a thermal flue damper, or an electronic 
ignition and an electronic flue damper would require an electric supply 
to gas-fired storage water heaters, and would potentially reduce vent 
temperatures resulting in excessive condensation developing in the 
vent. According to CHPK, these modifications would result in additional 
costs of providing an electric outlet for gas storage water heaters in 
a replacement situation and perhaps venting issues. (CHPK, No. 1008 at 
p. 1) DOE took into account in the calculation of installation costs 
the issues CHPK raised and applied a cost adder for an electric outlet 
and condensate treatment for the efficiency levels that require those.
    Regarding statements from some stakeholders that significant 
installation barriers are associated with gas condensing water heaters, 
the CA IOUs referred DOE to a report docketed in 2019 titled 
``Investigation of Installation Barriers and Costs for Condensing Gas 
Appliances.'' Key findings from this report indicate that these 
challenges impact less than 5 percent of condensing gas retrofit 
installations for residential and commercial applications, and that 
condensate management and chimney relining were minor concerns for 
installing gas condensing products. (CA IOUs, No. 1175 at p. 2) DOE 
agrees that installation challenges will impact only a subset of 
consumers, and even in those cases, DOE has included additional 
installation costs into the analysis.
c. 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 heaters 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) 
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 heat 
pump water heater installations. DOE also 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 heat pump water heaters installed in indoor 
locations. See appendix 8D of the final rule TSD for more details.
    PHCC commented that DOE acknowledges that up to 40% of 
installations could face space constrained heat pump installations and 
the suggestion that DOE provides to use louvered doors may not be 
applicable to all installations and the use of ducted air installations 
should be accounted for. (PHCC, No. 1151 at p. 4) PHCC noted that on 
page 8D-6 of NOPR TSD there are no modifications to remove and replace 
door jambs for basements and garages, but plumbing, building and 
mechanical codes require doorways to be of sufficient size to replace 
equipment without future removal of doors and door frames. (PHCC, No. 
1151 at p. 3) NMHC and NAA noted that DOE's suggestion that it may be 
possible to ignore manufacturers' specified volume of space for heat 
pump water heater installation based on ``current research'' is not 
acceptable as it conflicts with building code requirements to comply 
with manufacturer's instructions. NMHC and NAA also commented that 
DOE's suggestion for installation of heat pump water heaters by 
replacing utility closet doors with louvered doors is not viable as it 
ignores the impacts of increases in equipment noise in the smaller area 
of the typical apartment home. (NMHC and NAA, No. 996 at p. 4) Essency 
argued that the cost of moving the heat pump water heater was not 
calculated as there are significant additional electrical, plumbing, 
and other construction work that are required. (Essency, No. 1194 at p. 
2) EEI commented that it is important to recognize that installing heat 
pump water heater units in space-constrained areas (like closets or 
under stairs or in crawl spaces) will require significant retrofit 
costs given heat pump water heaters' physical operating requirements 
and the potential need for additional equipment. EEI commented that 
non-ducted heat pump water heaters require at least 700 cu ft of space 
to operate properly and achieve DOE's estimated efficiency levels, as 
shown in manufacturer specifications. EEI noted that 10 to 40 percent 
of water heaters are located in closets based on a survey by Southern 
Company. EEI commented that DOE's analysis does not include a realistic 
cost estimate for replacing electric resistance water heaters with heat 
pump water heaters in closets where walls, ceilings, and doors must be 
removed and replaced or ductwork

[[Page 37856]]

added in space constrained areas. EEI argued that DOE's analysis does 
not accurately account for the replacement costs in other space-
constrained environments such as crawl spaces, attics, utility rooms, 
or laundry rooms (EEI, No. 1198 at pp. 5-6) Armada argued that ideal 
efficiency conditions for heat pump water heaters require 1000 cubic 
feet of air. Armada argued that many homes cannot support such space 
demands, and use of heat pump water heaters will increase home heating 
costs for many consumers, diminishing any savings. Armada argued that 
only in very rare circumstances would consumers be able to quickly 
replace an electric storage water heater in an emergency, as many homes 
will require construction to accommodate the space and environment 
requirements of a heat pump water heater such as installing louvered 
doors or building ductwork. (Armada, No. 1193 at p. 6)
    In response to the preceding comments, DOE notes that the analysis 
takes into account the cost of moving the water heater to a different 
location or adding a louvered door for some installations. In the 
field, plumbers would guide the customers to select a way that works 
for them. In the analysis, DOE acknowledges the possible occurrence of 
those additional costs and on top of those DOE also applied a 
distribution of installation cost adders that ranges from $0 to $4,000 
in total for the most challenging installations, averaging $2,000 (see 
appendix 8D).
    NRECA commented that manufactured and small homes experience 
greater impact from both noise and cold air exhaust than larger homes 
that have more space to isolate the noise of the water heater and more 
air volume to buffer cold air exhaust. They commented that constrained 
spaces may not have enough room for mitigation measures such as supply 
and exhaust air ducting or noise dampening equipment. NRECA added that 
consumers will not welcome any increase in their electricity bills 
resulting from their heating system needing to work harder because of 
the heat pump water heater drawing on the warm air as its heat source. 
(NRECA, No. 1127 at p. 6). NRECA commented that manufactured and small 
homes will face unique installation challenges with heat pump water 
heaters. They noted that small and manufactured homes in NRECA member 
territories typically use 40- to 50-gallon lowboys, tall tanks, or 
tanks specifically designed for manufactured home closets, and that 
although DOE created a small electric storage water heater product 
class that covers some lowboy products this does not include tank sizes 
and form factors that electric cooperatives typically observe in space 
constrained spaces. NRECA cited the La Plata Electric Association 
(``LPEA'') pilot study where 20 heat pump water heaters were installed 
in owner-occupied manufactured homes and due to the complexity of 
installation, concluded that a majority of manufactured homes are not 
good candidates for a heat pump water heater. NRECA stated that 
although heat pump water heaters can be installed in some constrained 
spaces, they are likely not the best option when they cause high 
installation costs, noise and cold air impacts, and potentially 
unsightly installations to make the heat pump water heater fit a space 
that was never designed to accommodate it, and there often is no other 
available space in a small home to relocate the water heater, and 
reducing tank size can cause negative user experience. (NRECA, No. 1127 
at pp. 6-7) NRECA commented that because low-and-moderate income 
consumers disproportionately face complex installations, they are 
likely to disproportionately bear costs rather than savings as a result 
of the proposed rule and they received multiple examples from electric 
cooperatives illustrating that installation costs are far higher than 
DOE's estimates. (NRECA, No. 1127 at p. 8)
    NEEA noted that its research shows that heat pump water heaters can 
be installed in a wide range of conditions and climates, including very 
cold climates, and continue to deliver significant energy savings. 
(NEEA, No. 1199 at pp. 3-4) NEEA commented that its research supports 
DOE's installation cost analysis. (NEEA, No. 1199 at p. 7). However, 
BWC highlighted that NEEA is a regional organization that operates its 
programs primarily in the Northwestern United States and only included 
those consumers who had already made the decision to take advantage of 
available heat pump water heater rebate programs. (BWC, No. 1164 at p. 
20)
    In response, DOE acknowledges that manufactured homes and small 
homes typically have greater challenges in installing a heat pump water 
heater. Installing a heat pump water heater in such homes may require 
additional installation costs, as described above, more so than an 
average single-family home. The LCC analysis accounts for the higher 
installation costs for such homes. However, in many cases, such homes 
can utilize a small electric storage water heater instead of a heat 
pump water heater, significantly reducing their total installed cost. 
In terms of the cooling effect of the heat pump module, DOE took that 
into account in its energy use analysis the additional heating it might 
need in compensation, as discussed in section IV.E.3 of this document. 
DOE acknowledges that for low income homeowners, higher installation 
costs would indeed need more years of energy savings to pay back or may 
even lead to net cost, and this is accounted for in the overall LCC 
results. For renters, since they won't bear the first cost, it will 
more likely be economically beneficial (as discussed in section IV.I.1 
of this document).
    In the July 2023 NOPR, DOE did extensive revisions to its 
installation cost model to include installations of low-boy water 
heaters. DOE estimated around 10 percent of the total 20 to 55 gallon 
electric storage water heater market to be low boy water heaters. DOE 
assessed that many of these installations would require significant 
installation costs in order to install a heat pump water heater. DOE 
notes that at the proposed standard, most models currently serving the 
small electric water heater market will remain available.
    A.O. Smith argued that retrofit costs associated with space-
constrained installs are under-represented, especially for the lowboy 
electric resistance water heater to heat pump water heater transition. 
A.O. Smith also argued that undersizing an electric storage water 
heater (``ESWH'') and raising the temperature would not be possible in 
scenarios where a heat pump water heater would not fit in a confined 
space (which represents half of the modeled outcomes). A.O. Smith 
stated that while the difference in size for tall ESWH replacements is 
accounted for with a ~3 inch diameter increase, this same change is not 
accounted for in a substantial way for lowboys which present an even 
greater size constraint challenge. (A.O. Smith, No. 1182 at pp. 8-9) 
A.O. Smith pointed out that they could not find the referenced ``review 
of studies'' mentioned in Appendix 8D of the NOPR TSD which was 
supposed to include a literature review and a comparison of results of 
studies (related to lowboy costs) in response to previously submitted 
comments. (A.O. Smith, No. 1182 at p. 9) AHRI commented that DOE is not 
adequately considering the retrofit costs associated with space 
constrained retrofits. Specifically, DOE did not consider the added 
product and installation costs that would be faced by homeowners when 
replacing medium draw pattern lowboy or ``short'' electric resistance 
water heater with a heat pump water

[[Page 37857]]

heater. AHRI noted that consumers would not have the option to install 
an over-heated tank in lieu of facing space constrained scenarios as 
electric resistance storage water heaters with the capability of being 
overheated will not be permitted under the proposed energy conservation 
standard. AHRI stated that replacement of a lowboy with a heat pump 
would require the use of a more expensive split heat pump and would 
have additional installation costs. (AHRI, No. 1167 at p. 7)
    DOE is aware of the challenges of replacing a low boy water heater 
with a heat pump water heater, especially in confined space and in 
small homes or manufactured homes. As discussed above and in the July 
2023 NOPR, DOE applied significant installation cost adders to those 
installations to encompass the additional labor hour and materials 
needed to install such water heaters.
    A.O. Smith argued that DOE did not fully account for the increased 
product and installation costs associated with split-system heat pump 
water heater designs that would be used to replace lowboy 
installations. A.O. Smith recommended that DOE incorporate higher 
product and installation costs associated with split designs for 13.7 
percent of shipments in the medium electric storage water heater 
product class. (A.O. Smith, No. 1182 at p. 9) For this final rule DOE 
conducted further research on installing a heat pump water heater in a 
split system configuration. Currently there are not many models 
available for split system configuration and thus there are limited 
installation examples. DOE maintained its main analytical approach 
while adding a local installation cost sensitivity analysis for 
installing a split system heat pump water heater. Specifically, DOE 
modeled the cost line items needed for the installation of a 44-gallon 
low boy tank with a split heat pump module, which is a commonly used 
lowboy tank size for medium ESWHs. Appendix 8D of the final rule TSD 
provides more details on this sensitivity analysis. In summary, DOE 
found that the installation costs of a split system heat pump water 
heater are not necessarily higher than an integrated heat pump in a 
constrained space. Since DOE already applies a significant adder to the 
installation of an integrated heat pump water heater in these 
households, the overall average LCC savings would be more positive for 
the adopted heat pump level had DOE included this split heat pump 
option for medium electric storage water heaters in the main analysis. 
Even though the retail price for a split system heat pump water heater 
may be higher than an integrated heat pump, the lower installation cost 
for a split system heat pump water heater compared to an integrated 
heat pump water heater in a confined space and in small homes or 
manufactured homes is likely to result in an overall lower total 
installed cost. Should the market include more split heat pump models 
in the future, the likely cost impacts will decrease for consumers with 
water heaters in a confined space and in small homes or manufactured 
homes.
    A.O. Smith argued that DOE's analysis assumed that all water 
heaters in manufactured homes are 30 gal and therefore did not account 
for the costs of these units transitioning to heat pump levels. A.O. 
Smith also pointed out that DOE acknowledges that 40 gal are also 
common standards for manufactured homes. (A.O. Smith, No. 1182 at p. 
10) In response, DOE notes that the statement A.O. Smith was 
referencing was in a consultant report, where 30 gallon was only an 
example made to represent the cost breakdown of water heaters typically 
used in mobile homes. In DOE's actual analysis, different standard 
sizes were considered (see section IV.E.2 for more information).
    Rheem found the reported installation costs for heat pump water 
heater to be lower than expected, but the incremental installation 
costs between EL 0 and EL 3 aligned with their internal installation 
cost data. Rheem noted that as operation at high tank temperatures is 
expected to be representative of electric resistance water heater 
operation, the installation of a mixing valve should be included in 
DOE's analysis. (Rheem, No. 1177 at p. 9) 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.\76\ 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 final rule accounts for a 
fraction of installations that utilize a mixing valve.
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    \76\ See www.geappliances.com/appliance/GE-Smart-50-Gallon-Electric-Water-Heater-with-Flexible-Capacity-GE50S10BMM.
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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 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 chapter 10 of the FR TSD 
for more details.
4. Energy Prices
    Because marginal energy price more accurately captures 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 electricity 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.77 78 79

[[Page 37858]]

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 final rule 
TSD.
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    \77\ 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 December 1, 2023).
    \78\ U.S. Department of Energy-Energy Information 
Administration, Natural Gas Navigator (2022) (Available at: 
www.eia.gov/naturalgas/data.php) (Last accessed December 1, 2023).
    \79\ U.S. Department of Energy-Energy Information 
Administration, State Energy Data System (``SEDS'') (2021) 
(Available at: www.eia.gov/state/seds/) (Last accessed December 1, 
2023).
---------------------------------------------------------------------------

    GAAS argued that DOE has not fully responded to their previous 
suggestion of using the CMER (Consumer Marginal Energy Rates) method 
for energy prices. (GAAS, No. 1139 at p. 1)
    DOE has evaluated other estimates of marginal energy prices but 
maintains its approach in the final rule, since the data used to 
develop those prices are nationally representative. Stakeholders have 
previously proposed alternative methods and data to estimate marginal 
natural gas prices. However, DOE compared its seasonal marginal price 
factors developed from the EIA data to marginal price factors for 23 
gas tariffs provided by the Gas Technology Institute for the 2016 
residential boilers energy conservation standards rulemaking. 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. 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 
marginal price analysis, see appendix 8E of the final rule 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.\80\ 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'').\81\
---------------------------------------------------------------------------

    \80\ EIA. Annual Energy Outlook 2023 with Projections to 2050. 
Washington, DC. Available at www.eia.gov/forecasts/aeo/ (last 
accessed December 1, 2023).
    \81\ 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 December 1, 2023).
---------------------------------------------------------------------------

    AWHI suggested that the CA IOUs outline a price forecast scenario 
that more accurately accounts for future changes in energy costs. 
(AWHI, No. 1036 at p. 4) Gas Association Commenters argued that energy 
price assumptions from AEO are consistently overestimated and therefore 
should not be used (70% of the time was an overestimate for residential 
and 86% of the time was an overestimate for commercial sector between 
the 2010 and 2023 AEO projections). They argued that a distribution of 
prices should be used and not a forecasted mean. (Gas Association 
Commenters, No. 1181 at p. 34) Rinnai stated that DOE's average and 
marginal consumer energy price forecasts (from EIA) for electricity and 
gaseous fuels have historically overstated prices (particularly for 
natural gas). Rinnai stated that DOE should instead use energy prices 
employed in the Federal Trade Commission (``FTC'') Energy Guide labels 
because the uncertainty of applying forecasted prices shouldn't be 
primary drivers of LCC costs/savings and because FTC's use of AEO 
energy prices is audited annually and approved as published in the 
Federal Register prior to use for the EnergyGuide program. (Rinnai, No. 
1186 at pp. 26-28) ONE Gas argued that consumer energy price forecasts 
from the AEO have been shown to be notoriously unreliable from 
forecasting year to forecasting year, and they systematically 
overpredict natural gas prices over time. (ONE Gas, No. 1200 at pp. 10-
11) In response, DOE relies on AEO forecast for the energy price 
projection across appliance standards work as a cross-cutting 
methodology. Current energy prices are developed using other EIA data 
sources as described above. DOE acknowledges that it is difficult to 
project the future trend for any source given the uncertainty and 
unpredictability. However, AEO 2023 projects relatively flat energy 
price trends out to 2050 (see appendix 8E). AEO as issued by EIA 
remains the most comprehensive and trustworthy source and DOE maintains 
its methodology for this final rule. The energy prices developed for 
FTC are consistent with DOE's development of current energy prices 
(although here the analysis relies on marginal 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.\82\ DOE accounted for regional differences in labor costs 
by using RSMeans regional cost factors.
---------------------------------------------------------------------------

    \82\ RSMeans Company, Inc., RS Means Facilities Repair and 
Maintenance (2023), available at www.rsmeans.com/ (last accessed 
December 1, 2023).
---------------------------------------------------------------------------

    Ravnitzky stated that non-heat pump water heaters are less likely 
to require maintenance or repair than heat pump water heaters because 
they have a less complex design with fewer moving parts. (Ravnitzky, 
No. 73 at p. 1) Essency argued that maintenance costs are 
underestimated for heat pump water heaters because the lifetime of some 
components in heat pump water heaters will require replacements of 
parts once the heater is out of warranty. (Essency, No. 1194 at p. 3) 
Rheem voiced support

[[Page 37859]]

for DOE's handling of operational and maintenance costs over the life 
of the water heater. (Rheem, No. 1177 at p. 9)
    In response to Ravnitzky, research conducted by DOE has not shown 
that heat pump water heaters have different lifetimes than electric 
resistance storage water heaters. DOE has factored any additional 
maintenance or repair costs into the LCC. DOE takes into account 
replacement of certain parts after the warranty period. For the 
replacement of the heating element (which Essency provided as an 
example in its comment), the replacement cost is accounted for the 
fraction where it occurs and annualized across the years of use. The 
repair and maintenance cost summary in the final rule TSD represents 
the average cost with some households experiencing more or less than 
the reported value.
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.\83\ For this analysis, 
DOE relied on RECS 1990, 1993, 2001, 2005, 2009, 2015, and 2020.\84\ 
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.\85\ 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.
---------------------------------------------------------------------------

    \83\ 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 December 1, 2023).
    \84\ 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 
December 1, 2023).
    \85\ 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 December 1, 2023).
---------------------------------------------------------------------------

    Stanonik argued that increased average lifetimes for consumer 
storage water heaters are calculated estimates rather than based on 
field data thus leading to overstatements of average lifetime. Stanonik 
also argued that the increased complexity of newer products 
realistically would result in shorter lifetimes and more scenarios 
where ``replace'' might be a cheaper alternative than ``repair,'' and 
that these scenarios are not reflected well in the analysis. (Stanonik, 
No. 1197 at p. 2) NMHC and NAA noted that AHRI assumes a 10-13 year 
lifespan for water heaters, which is less than DOE's estimated 
lifetime. (NMHC and NAA, No. 996 at p. 6) DOE has conducted an 
extensive literature review, including studies and surveys and warranty 
information, to determine its product lifetimes, as discussed in 
appendix 8G. DOE also utilizes Weibull distribution for the product 
lifetime to capture the field variations.
    Noritz disputed that condensing and non-condensing products have 
the same average lifespan based on their internal testing. Noritz 
argued that the less complex nature of the non-condensing product in 
their testing typically lasts between 10 and 20 percent longer than a 
similar condensing product. Noritz argued that the analysis conducted 
by DOE that proposes the average lifespan of the two products to be 
identical will impact the LCC and payback analysis. (Noritz, No. 1202 
at p. 3). In response, DOE has not found any evidence in its research 
pointing to a significantly different lifespan for the two types of 
water heaters. As described in appendix 8G, the data sources cited did 
not indicate any systematic decrease in lifetime for gas-fired 
condensing products. For this final rule, DOE maintains its methodology 
of assuming the same lifetime within product classes.
    BWC noticed that the 2010 rulemaking reports an average lifetime of 
13 years, rather than the assumed 15 years in the current rulemaking. 
BWC claimed that the lower product lifetime conclusions reached by DOE 
in the 2010 rulemaking appear to be more consistent with the evidence 
presented in the NOPR TSD. Specifically, in Figure 8G.4.6 in the TSD, 
the inflection points of the curves in this figure more closely align 
with the assumed product lifetimes established as part of DOE's 2010 
rulemaking, and in the case of electric storage water heaters, indicate 
a product lifetime that is lower still. The assumed lifetime of 13 
years for heat pump water heater products is also shared by the ENERGY 
STAR program in its materials that promote these products. BWC 
requested that DOE elaborate on the reason for an increase in product 
lifetimes from the assumptions deployed in the 2010 rulemaking to the 
longer product lifetimes assumed in the July 2023 NOPR. BWC also 
requested that DOE explain the apparent discrepancies between the 
graphic demonstration of product lifetimes in 8G.4.6 and those 
expressed in Table 8G.4.1. (BWC, No. 1164 at pp. 3-4)
    From the 2010 Final Rule to this rulemaking, DOE was able to 
collect more evidence from literature review on product lifetime as 
well as develop a more robust survival function to calculate the 
lifetimes. Regarding the figure in the NOPR TSD, the inflection point 
represents the lifetime most water heaters will live to, whereas the 
average takes into account those who live an unusually short or long 
lifetime. The lifetime distribution in this rulemaking, compared to 
that of the 2010 rulemaking, has an early start, taking into account 
those that retire starting from year two, and a longer tail, allowing 
some water heaters to survive much longer than average. DOE believes 
that it is beneficial to capture the variations in lifetime and thus 
maintain its methodology in this final rule.
    BWC expressed support for DOE conducting a sensitivity analysis for 
all water heater product classes, as they claimed this is an effective 
way for this rulemaking to account for the reality that product 
lifetimes are not constant across efficiency levels and decrease with 
increased efficiency and complexity of a system. (BWC, No. 1164 at p. 
4) In order to evaluate the impact of the lifetime on the economic 
analysis results, for this final rule DOE conducted a sensitivity 
analysis, where two additional lifetime scenarios were evaluated. The 
sensitivity results do not change DOE's conclusion of economic 
justification of the adopted standards (see appendix 8G of the final 
rule TSD for the comparison of results).
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.\86\ The LCC

[[Page 37860]]

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.
---------------------------------------------------------------------------

    \86\ 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 
\87\ (``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 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 4.2 percent. See chapter 8 of the final rule TSD for further 
details on the development of consumer discount rates.
---------------------------------------------------------------------------

    \87\ 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 Dec. 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.\88\ 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 Lawrence Berkeley National Laboratory report, and the distribution 
varies by business activity.\89\ The average rate for consumer water 
heaters used in commercial applications in this final rule analysis, 
across all business activity and weighted by the market share of each 
product class, is 6.9 percent.
---------------------------------------------------------------------------

    \88\ Damodaran Online, Data Page: Costs of Capital by Industry 
Sector (2021) (Available at: pages.stern.nyu.edu/~adamodar/) (Last 
accessed December 1, 2023).
    \89\ 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 December 1, 2023).
---------------------------------------------------------------------------

    See chapter 8 of this final rule 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,\90\ 
ENERGY STAR unit shipments data,\91\ and data from a 2023 BRG Building 
Solutions report. \92\ To cover gaps in the available shipments data, 
DOE used DOE's public CCD model database \93\ and AHRI certification 
directory.\94\
---------------------------------------------------------------------------

    \90\ 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.
    \91\ 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 December 1, 2023).
    \92\ BRG Building Solutions. The North American Heating & 
Cooling Product Markets (2023 Edition). 2023.
    \93\ U.S. Department of Energy's Compliance Certification 
Database is available at regulations.doe.gov/certification-data 
(last accessed Dec. 1, 2023).
    \94\ Air Conditioning Heating and Refrigeration Institute. 
Consumer's Directory of Certified Efficiency Ratings for Heating and 
Water Heating Equipment. May 16, 2023. (Available at 
www.ahridirectory.org) (Last accessed December 1, 2023).
---------------------------------------------------------------------------

    The estimated market shares for the no-new-standards case for 
consumer water heaters are shown in Table IV.26. See chapter 8 of the 
final rule TSD for further information on the derivation of the 
efficiency distributions.
BILLING CODE 6450-01-P

[[Page 37861]]

[GRAPHIC] [TIFF OMITTED] TR06MY24.041

BILLING CODE 6450-01-C
    The LCC Monte Carlo simulations draw from the efficiency 
distributions and 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,\95\ 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 is relevant to other 
larger appliances such as consumer water heaters since they similarly 
represent large energy end uses. From these data, DOE found that 
households with larger square footage exhibited a higher fraction of 
High- or Super-High efficiency equipment installed. The fraction of 
respondents with ``super high efficiency'' equipment was larger by 
approximately 5 percent for larger households and correspondingly 
smaller for smaller households. DOE therefore 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.
---------------------------------------------------------------------------

    \95\ Decision Analysts, 2019 American Home Comfort Studies 
(Available at: www.decisionanalyst.com/Syndicated/HomeComfort/) 
(Last accessed January 5, 2024).
---------------------------------------------------------------------------

    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. However, 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 
finds that the method of assignment, which is in part random, 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

[[Page 37862]]

heaters make economically irrational decisions (i.e., the lack of a 
correlation 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. By using this approach, DOE acknowledges the variety of 
market failures and other consumer behaviors present in the water 
heater market, and does not assume certain market conditions 
unsupported by 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.\96\ 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.\97\ 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.\98\ R.H. 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.\99\ 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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    \96\ 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 January 5, 2024).
    \97\ Thaler, R.H., Sunstein, C.R., and Balz, J.P. (2014). 
``Choice Architecture'' in The Behavioral Foundations of Public 
Policy, Eldar Shafir (ed).
    \98\ 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).
    \99\ 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. For example, for the medium electric storage water heaters LCC 
sample, nearly 30 percent of households are renters, whereas for the 
small electric storage water heater LCC sample, nearly 50 percent of 
households are renters. These fractions are significantly higher for 
low-income households (see section IV.I of this document and chapter 11 
of the final rule TSD). The principle-agent problem can also impact 
homeowners. For example, 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 based on which products they 
are familiar with.
    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. The 
consideration of alternative product options is far more likely for 
planned replacements and installations in new construction.
    Additionally, Davis and Metcalf \100\ 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).
---------------------------------------------------------------------------

    \100\ 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 January 5, 2024).
---------------------------------------------------------------------------

    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, et 
al.\101\ show that consumers tend to underestimate the energy use of 
large energy-intensive appliances but overestimate the energy use of 
small appliances. Water heaters are one of the largest energy-consuming 
end-uses in a home. Therefore, it is likely that consumers 
systematically underestimate the energy use associated with water 
heater, resulting in less cost-effective water heater purchases.
---------------------------------------------------------------------------

    \101\ 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 January 5, 2024).
---------------------------------------------------------------------------

    These market failures may affect a sizeable share of the consumer 
population. A study by Houde \102\

[[Page 37863]]

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, though subsequent studies using 
alternative methodologies have highlighted other consumer groups who 
are to some extent responsive to local energy prices with their 
appliance purchases.\103\ The extent to which consumers are perceptive 
of energy prices and product efficiency when making appliance 
purchasing decisions is a topic of ongoing research.
---------------------------------------------------------------------------

    \102\ 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 January 5, 2024).
    \103\ Houde, S. and Meyers, E. (2021). ``Are consumers attentive 
to local energy costs? Evidence from the appliance market,'' Journal 
of Public Economics, 2011 (Available at: sciencedirect.com/science/article/pii/S004727272100116X) (Last accessed March 7, 2024).
---------------------------------------------------------------------------

    Although consumer water heaters are predominantly installed in the 
residential sector, some are also installed in commercial buildings 
(less than 10 percent of projected shipments; see chapter 9 of the 
final rule 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.104 105 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 in some cases 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.\106\ 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.\107\ 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.\108\
---------------------------------------------------------------------------

    \104\ 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.
    \105\ 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 January 5, 2024).
    \106\ 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).
    \107\ 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).
    \108\ 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 
January 5, 2024).
---------------------------------------------------------------------------

    Second, the nature of the organizational structure and design can 
influence priorities for capital budgeting, resulting in choices that 
do not necessarily maximize profitability.\109\ 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.\110\ 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.\111\
---------------------------------------------------------------------------

    \109\ 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.
    \110\ 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.
    \111\ Lovins, A. (1992). Energy-Efficient Buildings: 
Institutional Barriers and Opportunities. (Available at: rmi.org/insight/energy-efficient-buildings-institutional-barriers-and-opportunities/) (Last accessed January 5, 2024).

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[[Page 37864]]

    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.\112\ Asymmetric 
information in financial markets is particularly pronounced with regard 
to energy efficiency investments.\113\ 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,\114\ 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 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.\115\ 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).\116\ 
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.\117\
---------------------------------------------------------------------------

    \113\ 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.
    \114\ 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 
January 5, 2024).
    \115\ Cooremans, C. (2012). ``Investment in energy efficiency: 
do the characteristics of investments matter?'' Energy Efficiency, 
5(4), 497-518.
    \116\ 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 January 5, 2024).
---------------------------------------------------------------------------

    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 \118\ and 
required payback periods of many firms are higher than the appropriate 
cost of capital for the investment.\119\ 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.\120\ 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.\121\ 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,\122\ supermarkets,\123\ and the 
electric motor market.\124\
---------------------------------------------------------------------------

    \117\ 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 
January 5, 2024).
    \118\ 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.
    \119\ DeCanio 1994, op. cit.
    \120\ DeCanio, S.J. (1998). ``The Efficiency Paradox: 
Bureaucratic and Organizational Barriers to Profitable Energy-Saving 
Investments,'' Energy Policy, 26(5), 441-454.
    \121\ 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.
    \122\ 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.
    \123\ 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.
    \124\ 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 January 5, 2024).
---------------------------------------------------------------------------

    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. Although these studies are not specifically targeted 
to the water heater market, they cover decision-making generally and 
the impact of energy efficiency, operating costs, and future savings/
expenditures on those decisions, all of which apply to the purchase of 
a consumer water heater. DOE is not aware of any market failure studies 
specifically and narrowly focused on water heaters and so relies on the 
available literature discussed above. 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.
    DOE further notes that, in the case of gas-fired storage, oil-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. Accordingly, in the 
no new-standards case, 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 final rule, as most consumers 
will continue to be assigned the same efficiency regardless of the 
details of the methodology. In other words, as most consumers in the 
storage water heater market are choosing baseline or near-baseline 
efficiency products, there would be no significant difference between a 
random

[[Page 37865]]

assignment of those efficiency levels to consumers as to another type 
of assignment methodology such as one that tried to consider consumer 
rationality more explicitly--in either case nearly every individual 
consumer would be assigned a baseline or near-baseline efficiency 
product. This may be in contrast to a product with a broad distribution 
of efficiency levels purchased in the market, where changing the 
assignment methodology could more significantly impact the assignment 
of an efficiency level to individual consumers and therefore impact the 
results.
    Gas Association Commenters and Atmos Energy argued that random 
assignment methodology is unreasonable because it overstates standards-
compliant outcomes in the base case by capturing decisions that 
consumers would naturally choose on their own for economically 
beneficial reasons and it understates outcomes in the rule case by 
disproportionately including unattractive economic outcomes. Gas 
Association Commenters argued that consumer economic preference is not 
accounted for in random assignments, and argued that consumer choice 
models, which were used for fuel switching scenarios in gas furnaces, 
should be used in water heaters. Gas Association Commenters argued that 
random assignment creates extreme examples of economic benefits and 
consequences that heavily skew averages and are the least realistic 
outcomes as they would be the most obvious economic consumer choice. 
Gas Association Commenters argued that DOE has cases in their analysis 
where a standards-compliant product is the cheapest option but because 
of random assignment, a less-efficient, more expensive option is 
initially assigned, skewing benefits for rule scenarios. In its 
comment, Gas Association Commenters proposed alternatives to random 
assignment. (Gas Association Commenters, No. 1181 at p. 10 and pp. 11-
23; Atmos Energy, No. 1183 at pp. 6-7) Rinnai argued that DOE has not 
yet addressed the central criticism of the random assignment of base 
case efficiencies which is that DOE has not justified through either 
correlation or causation of random assignment to the alleged market 
failures it represents. Rinnai argued that there are many better 
alternate approaches to solving market failures beyond appliance 
standards. Rinnai argued that base case random assignment implies that 
consumers only make rational economic decisions in rulemaking 
scenarios. Rinnai argued many of the same points made in other comments 
already mentioned in this document; namely: consumers in base case 
choosing worse efficiency products even when doing so is more 
expensive; highly favorable economic outcomes that skew results; base 
case irrationality versus rulemaking case rational economic decision 
making. (Rinnai, No. 1186 at pp. 31-33)
    ONE Gas argued that in its comments that past issues of random 
assignment of consumers to appliance purchase decisions in the base 
case life cycle cost analysis has been an enduringly contentious issue 
with the Department's TSD approach, and the Department appears to have 
not undertaken measures to address stakeholder concerns of that kind. 
ONE Gas noted that more detailed review of this issue by industry 
stakeholders is ongoing. ONE Gas argued that the Department has never 
presented analysis that justifies linkages between market failure and 
random purchase behavior and no evidence is provided in the Preliminary 
Analysis TSD document that the Department has included additional 
consideration of NASEM peer review recommendation that calls on the 
Department to improve its coverage of market failure in relation to the 
setting of appliance minimum efficiency standards. ONE Gas proposed to 
the Department that it use alternative means of defining consumer base 
case efficiencies based upon one of two of the following base case 
definition strategies for consumer simulations: correlated consumer 
attributes approach or rational consumer economic choice approach. (ONE 
Gas, No. 1200 at pp. 11-12) NPGA, APGA, AGA, and Rinnai noted that 
DOE's response to comments on its failing to address consumer choice 
and to account for consumers making choices based on rational economic 
terms in the July 2023 NOPR is arbitrary, capricious, and without 
foundation. NPGA, APGA, AGA, and Rinnai commented that instead of 
referencing actual interviews or studies, DOE pivoted to a ``cherry-
picked'' library of behavioral economics papers that have no bearing or 
relevance to water heaters or the proposed rule. (NPGA, APGA, AGA, and 
Rinnai, No. 441 at p. 4) AHRI recommended that DOE provide a theory of 
market performance tailored to the specific situation for each and 
every rulemaking. AHRI commented that DOE should build an analytical 
approach that reflects some degree of market efficiency, rather than 
assuming complete market efficiency. AHRI acknowledges that this may 
necessitate a rethinking of the Monte Carlo method and the assignment 
of base and standard case efficiencies. (AHRI, No. 1167 at p. 17) AHRI 
highlighted that AHRI demonstrated there are ways to use the current 
Monte Carlo approach to generate results and then use alternative 
ranking systems to assign base and standards case efficiencies. (AHRI, 
No. 1167 at p. 18) AHRI commented that DOE misunderstands the role of 
plumbing contractors in the decision process and DOE implies that the 
influence of plumbing contractors on water heater type purchased in the 
replacement scenario is a form of market failure. AHRI claimed this is 
incorrect as contractors serve as the information mediators to overcome 
one of the key sources of possible market failure identified by DOE--
the absence of knowledge from consumers who rarely purchase water 
heaters. (AHRI, No. 1167 at p. 18) AHRI posed the following questions 
for DOE related to market failure: ``Why has DOE not adopted the 
National Academies of Sciences (NAS) peer review recommendations and 
when will it do so? On what basis has DOE determined that there are 
significant market failures for residential water heaters, how 
prevalent are these failures and do standards address them? How will 
DOE modify its random assignment approach to be more responsive to 
actual market conditions? '' (AHRI, No. 1167 at p. 18) Gas Association 
Commenters argued the tab ``No-New Standards Case UEF'' of the analysis 
tool incorrectly states an equation (relative to the coded version) for 
how square footage of residences impacts likelihood of efficiency of 
products. (Gas Association Commenters, No. 1181 at p. 35) Gas 
Association Commenters argued that adjustment factors used based on 
square footage do not make sense for this analysis and instead size of 
household should be used. (Gas Association Commenters, No. 1181 at p. 
35) Gas Association Commenters argued that estimated fractions of 
shipments by market shares do not exactly match the stated 
distributions (see specifics in comment). (Gas Association Commenters, 
No. 1181 at p. 35) ONE Gas commented that, unlike many other products 
covered by EPCA, consumers rarely have opportunity to consider other 
water heating options when hot water is unavailable in a residence, a 
premium exists to restore service, especially since water heater 
failure is rarely anticipated by an average consumer; when time or 
other circumstances allow, the consumer is likely to make a rational 
consumer choice based, first and foremost, on minimizing installed 
cost;

[[Page 37866]]

life cycle cost considerations and other factors play a role in 
decision making, provided comparative installed costs are available to 
the consumer. (ONE Gas, No. 1200 at p. 5)
    In response, DOE notes that even for consumers who are motivated 
and informed, the choice of product efficiency that perfectly minimizes 
life-cycle cost is highly nuanced and requires access to many sources 
of information. To make a decision that maximizes benefits for any 
given consumer, that consumer would need to consider information 
including utility bills for at least a year (and have the ability to 
disaggregate the portion of the utility bill specific to the water 
heater), the expected lifetime of the product, knowledge of equipment 
and installation costs up front, knowledge of each potential product's 
efficiency and performance in the field, future repair and maintenance 
costs, the value of future operating savings and costs in the present 
year, etc. This is a time-consuming and nontrivial calculation for even 
the most motivated consumer and requires significant data collection to 
make even a decent approximation. While there is some information 
easily available to the consumer prior to making a purchase (e.g., 
labels, technical specifications, price estimates, etc.), this 
information typically assumes an average household. Therefore, for a 
consumer wishing to make an informed decision that results in 
minimization of life-cycle costs in the no-new-standards case based on 
such a label, it would require knowing how their own situation differs 
from an average national household (e.g., hot water usage, energy 
price, ambient indoor air temperature, inlet water temperature, etc.). 
This evaluation is very complex. These challenges are part of the 
reason why consumer perception of energy consumption of appliances is 
varied and the extent to which consumers choose product efficiency 
based on this perceived energy consumption is mixed, as discussed in 
some of the literature cited above. There is empirical evidence that, 
on average, consumers' perceived energy consumption of household 
appliances and equipment does not match the actual energy consumption.
    Acknowledging this consumer behavior, PHCC commented that in the 
case of replacement due to a failed water heater, many consumers will 
prioritize a water heater that is readily available within their price 
range and will not consider energy efficiency in their decision. They 
further comment that most consumers never even look at the energy 
label, they just want hot water at the lowest cost. (PHCC, No. 1151 at 
p. 6)
    As stated above, the use of a random assignment of water heater 
efficiency in the no-new-standards case of LCC model is a 
methodological approach that reflects the full range of consumer 
behaviors in this market, including consumers who make informed and 
economically beneficial decisions and other consumers who, due to the 
market failures discussed, do not or cannot make such perfectly 
economically beneficial decisions. The methodology is further 
constrained by shipments data by efficiency level; it must produce an 
overall distribution that matches the available data. In the simplest 
case, where baseline market shares are split between one lower 
efficiency level and one higher efficiency level, DOE's methodology 
results in the following groups of consumers:

    (1) Consumers who, in the absence of standards, choose a lower 
efficiency product with a lower life-cycle cost based on their 
surveyed hot water usage. These consumers are making an optimal 
choice from the perspective of cost savings in the model in the no-
new-standards case. With amended standards, they are made to 
purchase a more efficient product and therefore experience a net 
cost in the standards case. The efficiency assignment model is 
already assigning minimal-cost choices to this fraction of consumers 
in the no-new-standards case.
    (2) Consumers who, in the absence of standards, choose a higher 
efficiency product that also lowers their life-cycle cost compared 
to the baseline efficiency product. These consumers are making a 
cost-minimizing choice in the model in the no-new-standards case. 
With amended standards, these consumers are not impacted because 
they are already purchasing a standards-compliant product. The 
efficiency assignment model is already assigning minimal-cost 
choices to this fraction of consumers in the no-new-standards case.
    (3) Consumers who, in the absence of standards, choose a lower 
efficiency product that does not minimize their life-cycle cost. The 
market failures discussed above apply to these consumers, preventing 
them from making the choice that minimizes their costs in the no-
new-standards case. With amended standards, they are made to 
purchase a more efficient product that ultimately results in a lower 
life-cycle cost. These consumers experience a net benefit as a 
result of the standard.
    (4) Consumers who, in the absence of standards, choose a higher 
efficiency product that does not lower their life-cycle cost 
compared to the baseline or lower efficiency product. Although these 
consumers are choosing a higher efficiency product in the no-new-
standards case, they may have incomplete knowledge of the energy 
consumption of the equipment or may value environmental features 
such as efficiency more heavily, resulting in a choice of a higher 
efficiency product that does not lower life-cycle cost compared to a 
baseline or lower efficiency product. With amended standards, these 
consumers are not impacted because they are already purchasing a 
standards-compliant product.

    DOE's methodological approach is a proxy that ultimately reflects a 
diversity of scenarios for consumers and therefore the range of 
outcomes that will result from this diversity. The approach already 
reflects market share outcomes consistent with some degree of market 
efficiency and optimal decision-making among some consumers, but the 
approach also acknowledges a number of factors that hinder perfect 
decision-making for others. Furthermore, the model produces an overall 
distribution of efficiency that matches the available shipments data.
    Although DOE's random assignment methodology does not explicitly 
model consumer decision making, nor does it take a stance on the 
rationality or irrationality of specific consumers, DOE believes that 
the approach would be consistent with a model in which some share of 
consumers make economically optimal decisions, and some consumers--in 
the face of market failures--do not. The use of a random assignment of 
water heater efficiency is a methodological approach that reflects the 
full range of consumer behaviors in this market, including consumers 
who make economically beneficial decisions and consumers who, due to 
market failures, do not or cannot make such economically beneficial 
decisions, both of which occur in reality. Within those constraints, 
DOE then assigns product efficiencies to consumers in the LCC, 
consistent with the economics literature discussed above, to reflect 
neither purely rational nor purely irrational decision-making.
    DOE's analytical approach reflects some degree of market 
efficiency. An alternative approach which assumes consumer behavior is 
based solely on cost outcomes, for example by ranking LCCs and using 
those to assign efficiencies as suggested by the commenters, is not 
evidenced by the scientific literature surveyed above or by any data 
submitted in the course of this rulemaking. Such an approach would 
depend on the assumption, for example, that homeowners know--as a 
rule--the efficiency of their homes' water heater and water heating 
energy use, such that they always make water heating investments 
accordingly. Similarly, such an approach would assume that, faced with 
a water heater failure, homeowners will always select as a replacement 
the most economically beneficial available model. Given the work 
documenting market failures in

[[Page 37867]]

energy efficiency contexts described above, DOE believes that such 
assumptions would bias the outcome of the analysis to the least 
favorable results. DOE's approach, by contrast, recognizes that 
assumptions like these hold for some consumers some of the time--but 
not all consumers and not at all times.
    As part of the random assignment, some households or buildings with 
large water heating loads will be assigned higher-efficiency water 
heaters in the no-new-standards case, and some households or buildings 
with particularly low water heating loads will be assigned baseline 
water heaters--i.e., the lowest cost investments.
    DOE ran a sensitivity to look at the base-case shipment 
distribution in 2030 that would be expected if every consumer made 
their purchasing decision based on minimizing their life-cycle costs to 
understand how this compares to actual consumer purchases based on the 
data on shipments by efficiency. If every consumer in the LCC sample 
chose a product that minimized their total life-cycle cost (i.e., 
perfectly rational, cost-minimizing consumers), the resulting 
distribution of products by efficiency would deviate significantly from 
the actual efficiency distribution, as determined from market share 
data and shipments data by efficiency. For example, for medium ESWHs, 
the baseline efficiency (EL 0, representing an electric resistance 
water heater) results in a minimum life-cycle cost for only 36 percent 
of all consumers in the LCC analysis, while higher efficiency heat pump 
water heaters (ELs 1, 2, and 3) result in a minimum life-cycle cost for 
the remaining 64 percent of consumers. Therefore, in a scenario in 
which all consumers made cost-minimizing choices, one would expect the 
efficiency distribution of new shipments in 2030, without any amended 
standards, to be 36 percent electric resistance medium ESWHs and 64 
percent heat pump medium ESWHs (at various efficiencies). However, the 
projected efficiency distribution in 2030, based on existing market 
share and actual shipments data (and even accounting for the recent 
growth trend of heat pump water heaters), is that only 12 percent of 
the market will be heat pump water heaters despite the fact that these 
water heaters would result in lower total life-cycle costs for 64 
percent of consumers, i.e., at least half of consumers will be 
selecting a water heater that does not minimize their costs. This 
significant discrepancy suggests the presence of the market failures 
discussed previously in the medium ESWH market, which prevents a 
significant portion of consumers from making purchasing decisions that 
would minimize their life-cycle costs.
    Regarding the role of contractors, DOE notes that they can exert a 
high degree of influence over the type of water heater purchased. DOE 
acknowledges that they can serve as an information mediator. However, 
it is possible for a contractor to also influence the decision toward a 
familiar like-for-like replacement, for example, or perhaps the 
quickest replacement option available (e.g., based on equipment 
availability). An individual contractor may not be familiar with every 
product option available on the market. Ultimately, there are multiple 
actors involved in the decision-making process which results in complex 
purchasing behavior.
    As DOE has noted, there is a complex set of behavioral factors, 
with sometimes opposing effects, affecting the water heater market. It 
is impractical to model every consumer decision incorporating all of 
these effects at this extreme level of granularity given the limited 
available data. Given these myriad factors, DOE estimates the resulting 
distribution of such a model would be very scattered with high 
variability. It is for this reason DOE utilizes a random distribution 
(after accounting for market share constraints) to approximate these 
effects. This is the standard methodological approach used on all of 
DOE's prior rules. The methodology is not an assertion of economic 
irrationality, but instead, it is a methodological approximation of 
complex consumer behavior. The analysis is neither necessarily biased 
toward high or low energy savings. The methodology does not 
preferentially assign lower-efficiency water heaters to households in 
the no-new-standards case where savings from the rule would be 
greatest, nor does it preferentially assign lower-efficiency water 
heaters to households in the no-new-standards case where savings from 
the rule would be smallest. However, it is worth noting that energy use 
could be improperly estimated if preferences for energy efficiency are 
correlated with demand for hot water. Some consumers were assigned the 
water heaters that they would have chosen if they had engaged in the 
kind of perfect economic thinking upon which the commenters have 
focused. Others were assigned less-efficient water heaters even where a 
more-efficient water heater would eventually result in life-cycle 
savings, simulating scenarios where, for example, various market 
failures prevent consumers from realizing those savings. Still others 
were assigned water heaters that were more efficient than one would 
expect simply from life-cycle costs analysis, reflecting, say, 
``green'' behavior, whereby consumers ascribe independent value to 
minimizing harm to the environment.
    DOE cites the available economic literature of which it is aware on 
this subject, supporting the existence of the various market failures 
in other appliance markets which would give rise to such a 
distribution, and has requested more data or studies on this topic in 
the May 2020 RFI, March 2022 preliminary analysis, and July 2023 NOPR. 
DOE is not aware of any specific study regarding how consumer water 
heaters (and their efficiency) are purchased.
    In summary, DOE's efficiency assignment methodology produces 
overall results that are consistent with the observed distribution of 
efficiency across products as seen in the shipments data. The 
methodology also results in a share of consumers being assigned product 
efficiencies that minimize their lifetime costs in the absence of 
standards. This represents consumers making informed decisions 
regarding the efficiency of their products, without amended standards. 
These consumers will be negatively impacted by the adopted standard 
levels and the analysis accounts for these impacts. However, the 
methodology also acknowledges that some consumers are unable to 
minimize the life-cycle costs of their products for a variety of 
reasons discussed in the economics literature (e.g., renters with no 
say in the products purchased for their household). Even for motivated 
and informed consumers, the information and data required to ultimately 
make the best product choice that minimizes life-cycle cost is complex 
and time-consuming. As a result, there are a subset of consumers for 
whom adopting more stringent standard levels will result in life-cycle 
savings. In contrast to some commenters' characterization, DOE's 
methodology already reflects some degree of market efficiency in terms 
of consumer choice of product efficiency, but it also reflects a 
variety of observed effects that inhibit perfect market efficiency. 
This is representative of the water heater market. On the whole, when 
accounting for both consumers negatively impacted by, as well as those 
benefiting from, amended standards, DOE's analysis demonstrates that 
there are economically justified savings.
    Finally, DOE notes that the recommendations of the NAS report, 
which pertain to the processes by which DOE analyzes energy 
conservation

[[Page 37868]]

standards, will be addressed as part of a separate notice-and-comment 
process.
9. 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 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.
    Armada noted that the EPCA creates a rebuttable presumption that an 
energy conservation standard is economically justified if the 
additional cost is less than three times the value of the first year's 
energy savings, but the initial costs to switch from an electric 
resistance storage water heater to one with heat pump technology is 
greater than a three-year payback period, and that assumes the 
consumer's home can accommodate a heat pump water heater. (Armada, No. 
1193 at pp. 5-6) In response, DOE notes that the rebuttable presumption 
provision is not a requirement that the average PBP of a standard must 
be less than three years. Rather, it establishes a presumption that a 
standard meeting that criteria is economically justified, which is then 
evaluated further using the other criteria used to evaluate economic 
justification. Whether the presumption is or is not met, a 
determination of economic justification must be based on the criteria 
specified by EPCA, as is the case for this final rule.
10. Accounting for Product Switching
    For the preliminary analysis, DOE did not account for the product 
switching under potential standards. For the July 2023 NOPR and this 
final rule, DOE maintained the same approach and did not include any 
product switching in its analysis, other than consumers potentially 
downsizing their electric storage water heater to a small electric 
water heater, as discussed in more detail in section IV.G.1 of this 
document. DOE assumes that any product switching as a result of the 
proposed standards is likely to be minimal.
    As discussed in the specific examples below, the costs to switch to 
another product class are higher than simply purchasing a standards-
compliant product in the same product class. When faced with the need 
to replace a water heater, a consumer can either install a standards-
compliant product of the same product class as they originally had, or 
spend even more to switch to an alternative product class. Because of 
this higher cost to switch, DOE concludes it is extremely unlikely that 
consumers would choose to spend more to switch product classes 
specifically in response to amended standards. In the absence of 
amended standards, some consumers choose to switch for reasons other 
than simply cost, and that is reflected in historical market trends 
that are incorporated into the analysis. However, for the purposes of 
the analysis, the issue is whether more consumers would switch due to 
the higher incremental costs of standards-compliant products. DOE 
concludes that this is very unlikely and therefore market trends will 
be unaffected.
    In the hypothetical case of a consumer switching from a gas-fired 
storage water heater to an electric water heater (storage or 
instantaneous), there are likely additional installation costs 
necessary to add an electrical connection since both of these types of 
electric water heaters require high wattage. These are costs above and 
beyond the normal installation costs included in the LCC analysis. In 
some cases, it may be possible to install a 120-volt 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-volt electrical storage water heater would be 
installed. To do so, the consumer would need to add a 240-volt circuit 
to either an existing electrical panel or upgrade the entire panel if 
there is insufficient room for the additional amperage. The 
installation of a new 240-volt circuit by a qualified electrician will 
be at least several hundred dollars. Panel upgrade costs are 
significant and can be approximately $750--$2,000 to upgrade to a 200-
amp electrical panel.\125\ 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 for nearly all homes potentially switching to an electric water 
heater, DOE estimates that very few consumers would switch from gas-
fired storage water heaters to electric water heaters as a result of an 
energy conservation standard, especially at the proposed standard at 
TSL 2. At TSL 2, the average total installed cost of an electric 
storage water heater is $1,855 compared to the average total installed 
cost of $1,578 for a gas-fired storage water heater (see section V.B.1 
of this document). Further, these costs do not include the electrical 
upgrade costs necessary when switching from a gas-fired to an electric 
water heater. When including those costs, the average total installed 
cost to switch to an electric water heater is significantly higher than 
the standards-compliant gas-fired storage water heater (electric 
instantaneous water heaters were not analyzed in this rule, however the 
electrical panel upgrade cost alone is nearly as much as a standards-
compliant gas-fired storage water heater). Switching from a gas-fired 
to an electrical water heater is especially unlikely 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 a water heater that utilizes a different fuel source in the 
emergency replacement scenario.
---------------------------------------------------------------------------

    \125\ For example, see: www.homeadvisor.com/cost/electrical/upgrade-an-electrical-panel/#upgrade (last accessed Dec. 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

[[Page 37869]]

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 require bringing in a natural gas 
connection from the street level to the home. Additionally, switching 
to a gas-fired water heater would require the installation of new gas 
plumbing in the home, even if the home currently uses natural gas, 
which would add several hundreds of dollars to the installation 
costs.\126\ 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. Installing new venting 
represents a significant additional cost when switching from an 
electric water heater to a gas fired heater. The LCC averages presented 
in V.B.1 of this document for the gas-fired water heaters include some 
situations where vent replacement is not necessary, and none of the 
replacement situations require adding gas lines, therefore typical 
installation costs for switching from an electric water heater to a 
gas-fired water heater would be higher than the averages presented in 
section V.B.1 of this document. Therefore, the 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.
---------------------------------------------------------------------------

    \126\ For example, see: www.homeadvisor.com/cost/plumbing/install-or-repair-gas-pipes/ (last accessed March 8, 2024).
---------------------------------------------------------------------------

    Even if some consumers of medium ESWHs elected to switch to a non-
electric water heater (e.g., a GSWH), despite the additional costs of 
doing so and instead of simply purchasing a standards-compliant medium 
ESWH, the rule would still save a significant amount of energy. These 
consumers would still need to purchase a standards-compliant GSWH. Such 
switching from medium ESWHs to GSWHs or GIWHs would result in a slight 
increase in FFC energy consumption for these consumers, however that is 
more than made up for by the rest of the savings from medium ESWH 
consumers, even after accounting for consumers switching to small 
ESWHs. The energy savings for the rest of the medium ESWHs are at least 
an order of magnitude larger than any incremental increase in energy 
consumption from a small subset of consumers who might switch to GSWHs 
or GIWHs. Under the assumption that all such consumers who switch to 
gas-fired water heaters face an increase in cost, the total percentage 
of existing medium ESWH consumers experiencing a net cost as a result 
of the rule would therefore increase by a proportional amount. For 
example, even if 10 percent of medium ESWH consumers elected to switch 
to gas-fired water heaters despite the costs, the percentage of 
consumers experiencing a net cost would increase by at most 10 percent 
and the average LCC savings for medium ESWH consumers would still be 
positive, which would not change DOE's conclusion that the standards 
adopted are economically justified.
    Lastly, in the hypothetical case of a consumer switching from a 
GSWH to a GIWH, there are additional installation costs necessary as 
well. The vast majority of GSWHs utilize non-condensing technology that 
utilizes Category I type B metal vent material, whereas switching to 
GIWHs would require Category III or Category IV venting material. 
Regarding non-condensing GIWHs, A.O. Smith noted that these utilize 
Category III venting (A.O. Smith, No. 1182 at p. 15). Condensing GIWHs 
require Category IV venting. Switching from a GSWH to a GIWH would 
therefore require replacing the venting in either case. Replacing the 
venting system would result in significant installation costs. 
Additionally, 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 when switching from 
GSWH to GIWH. This is especially true if the line also services a gas 
furnace. Upgrading a gas line could add several hundred dollars in 
extra costs or more. As a result of all the cost considerations above, 
DOE estimates that very few consumers would switch from GSWHs to GIWHs 
specifically as a result of the incremental costs of the amended energy 
conservation standard for GSWH, particularly in the case of an 
emergency replacement.
    Ravnitzky expressed concern that the proposed standards favor heat 
pump water heaters over gas-fired or electric resistance water heaters. 
Ravnitzky claimed that the proposed standards would result in non-heat 
pump water heaters becoming more expensive and less competitive in the 
market and may force some consumers to switch to heat pump water 
heaters.\127\ (Ravnitzky, No. 73 at p. 1)
---------------------------------------------------------------------------

    \127\ Ravnitsky incorrectly asserted that the proposed standards 
would require a minimum UEF of 0.96 for gas-fired water heaters, 
0.95 for electric resistance water heaters, and 0.85 for heat pump 
water heaters.
---------------------------------------------------------------------------

    In response, given the upfront cost differential for heat pump 
electric storage water heaters and gas-fired water storage heaters, DOE 
does not expect that the adopted standards would induce consumers to 
switch to heat pump water heaters. In addition, DOE notes that gas-
fired storage water heaters are not being eliminated as a result of the 
standards being established in this final rule.
    According to NPGA, APGA, AGA, and Rinnai, DOE made an assumption 
about product switching, then reinforced its assumption without 
analysis, ignoring the possibility that consumers may want to switch 
product classes based on the proposed rule, but product classes may not 
be available for such switching, and based on this assumption, DOE 
conveniently omitted any installation costs in its LCC and PBP 
analysis, showing its market analysis is inherently flawed and must be 
reevaluated. (NPGA, APGA, AGA, and Rinnai, No. 441 at p. 4-5) DOE notes 
that its assessment is based on the comparison of total installed costs 
needed to switch from product class to product class. In response, DOE 
determined that there would be minimal switching due to the additional 
installation cost for a variety of possible scenarios, as discussed 
above. Specifically in the case of switching from a GSWH to a GIWH, 
these costs include upgrading gas lines and replacing the venting. 
Like-for-like replacement for the water heater product classes 
considered in this rulemaking, as DOE determined and summarized in the 
installation cost analysis, is the most cost efficient. DOE does not 
reject the idea that consumers may choose a different product class in 
response to the no new standards case for reasons other than just total 
costs. Indeed, the shipments projection accounts for recent market 
trends that show growing consumer demand for GIWHs compared to GSWHs.
    NMHC and NAA stated that DOE's assumption of minimal product 
switching as a result of the proposed standard fails to account for 
forced product switching driven by typical

[[Page 37870]]

space limitations in existing multifamily dwellings where frequently 
the water heater shares a small closet with stacked laundry facilities 
and owners will be forced to switch to instantaneous water heaters with 
additional installation costs associated with venting, larger-sized gas 
supply piping, or electrical panel upsizing. (NMHC and NAA, No. 996 at 
p. 5) In response, DOE notes that existing market trends are 
incorporated into the shipments analysis and projection. To the extent 
that some product classes are becoming more prevalent in certain types 
of buildings, that is reflected in the no-new-standards case shipments 
projection. The most commonly used electric water heater for the 
scenario described by NMHC and NAA would be a low-boy electric storage 
water heater, likely to be in the small ESWH product class. This rule 
does not amend standards for small ESWHs and therefore the consumers of 
this product class will not be impacted. As DOE has discussed above, 
the costs to switch product classes in response to amended standards 
are larger than simply purchasing standards-compliant products within 
the same product classes. Therefore DOE estimates that no additional 
switching will occur beyond existing market trends.
    NRECA stated that a large percentage of co-op consumers have no 
access to natural gas service and have no affordable alternative option 
for a product that performs equivalent to electric resistance water 
heating, and therefore eliminating electric resistance water heating as 
an option in the market would pose a serious problem for many of the 
consumer-members served by cooperatives. They commented that these 
consumers that could not afford heat pump water heaters or their 
housing stock does not allow for their installation may be forced to 
choose electric tankless (or instantaneous) water heaters, which units 
may provide good comfort to consumers but have negative impacts to 
utilities by potentially creating spikes in demand of 20 kW 
instantaneously. NRECA commented that adding to a cooperative's peak 
demand can significantly raise their costs and add to the electric 
rates of all their consumer-members who must bear the cost. NRECA 
stated that at least one cooperative told them that most new housing 
stock in their territory is being equipped with electric tankless units 
and that it is not clear that DOE's analysis accounts for switching 
from electric storage to instantaneous electric. (NRECA, No. 1127 at p. 
9) In response, DOE reiterates that a significant cost adder has been 
applied to the fraction of electric storage consumers that have 
challenging installation cases. For these consumers, DOE considered 
several downsizing options with significantly lower installation costs, 
including switching to a small electric storage water heater, and took 
that impact into account in its shipment analysis (see section IV.G.1.a 
of this document). In regards to the grid impact, this is discussed 
more in section III.A.3 of this document. Finally, DOE notes that 
although it did not analyze electric instantaneous water heaters, they 
represent a very small market share at present. DOE did include, 
however, an option to pair a small electric storage water heater with a 
``booster'' instantaneous water heater as one of the switching options 
for medium electric storage water heaters (see section IV.G.1.a of this 
document).
    Atmos Energy argued that because the cost to fuel switch is high, 
DOE fails to ``acknowledge the equally prohibitive costs that will be 
associated with high efficiency gas appliances as a result of this 
proposal and the lack of gas-fired replacements in the market.'' (Atmos 
Energy, No. 1183 at p. 6). Rinnai argued that DOE has failed to take 
into account substitution effects in replacement markets. Rinnai stated 
that the following are lacking from the analysis: replacement of water 
heaters with same category of consumer water heaters that meet a 
particular standard level; replacement with water heaters using 
different fuel or different product category (e.g., GSWH to GIWH; GSWH 
to ESWH; ESWH to GSWH, etc.); and repair of existing product; thereby 
delaying the replacement. (Rinnai, No. 1186 at pp. 30-31) The Gas 
Association Commenters commented that the proposals in the July 2023 
NOPR would create an enhanced market for heat pumps, diminishing 
competition between gas and electric water heaters. (Gas Association 
Commenters, No. 1181 at pp. 32-39) A.O. Smith stated that storage and 
tankless water heaters use incompatible venting systems (GSWH use Cat I 
while non-condensing tankless water heaters use Cat III). (A.O. Smith, 
No. 1182 at p. 15) As discussed above, DOE estimates that switching 
between gas-fired and electric water heaters as a result of the rule is 
likely to be negligible, as is switching from gas-fired storage to 
instantaneous water heaters, due to the high installation costs of such 
switching, (costs that are acknowledged to be high by Atmos Energy in 
their comment). DOE finds no evidence that there would be a lack of 
gas-fired water heater models available in the standards case for 
replacements. Many such models are currently available by multiple 
manufacturers. DOE acknowledges that in the standards case, many 
electric water heaters would transition to heat pump water heaters. 
However, since DOE estimates negligible switching between electric and 
gas-fired water heaters, there is no reason to expect this would alter 
the competition between electric and gas-fired water heater markets. 
Furthermore, many manufacturers produce both electric and gas-fired 
water heaters. Lastly, DOE agrees that gas-fired storage and 
instantaneous water heaters use incompatible venting systems and 
therefore switching from storage to instantaneous would require 
significant extra installation costs. See chapter 8 and appendix 8D of 
the final rule TSD for detailed description of the installation costs.
    Noritz commented that the ability to replace a water heater in an 
emergency is an important attribute of value to consumers, and changes 
in installation patterns raise costs and impose other time-related 
constraints such as changing venting patterns, carpentry to make 
changes to the house, and possible electrical work to complete 
installation. (Noritz, No. 1202 at pp. 1-2) PHCC commented that in the 
case of replacement due to a failed water heater, many consumers will 
prioritize a water heater that is readily available within their price 
range and will not consider energy efficiency in their decision. 
According to PHCC, energy efficiency increases costs and decreases 
demand which leads to a longer wait time for installation and makes a 
more energy efficient water heater an unattractive option in a time 
when households simply care about having hot water and a working water 
heater as soon as possible. (PHCC, No. 1151 at p. 6) DOE agrees that in 
emergency replacement, like-for-like equipment provides the most 
convenience to the consumer. However, DOE estimates that the 
installation of condensing equipment, including the flue venting, the 
condensate pump, and neutralizer can be accomplished as part of an 
emergency replacement, meaning that for emergency replacements, non-
condensing equipment do not bring significant additional value.
11. Analytical Results
    AHRI commented that DOE does not provide a measure of uncertainty 
in LCC results. AHRI commented that each independent variable in LCC 
analysis has uncertainty, and DOE does not document how confident DOE 
should be in its estimates. AHRI asked DOE the

[[Page 37871]]

following questions related to model uncertainty: What is the estimated 
standard deviation around the mean change in LCC at each EL and for 
each product class? (AHRI, No. 1167 at p. 23) AHRI commented that DOE 
does not take account of the fact that operating costs, including 
energy, are deductible as business expenses for Federal and some state 
income taxes for commercial customers in its LCC analysis and asks for 
DOE's justification for not taking it into account. AHRI recommended 
that DOE considers the effects of this tax deductibility in computing 
the change in life cycle cost. AHRI claimed that failing to account for 
this is inconsistent with other aspects of DOE's analyses. (AHRI, No. 
1167 at p. 16)
    In response, DOE clarifies that it uses probability distributions 
for a number of input variables that are reasonably expected to exhibit 
natural variation and diversity in practice (e.g., lifetime, repair 
cost, installation costs). These probability distributions are modeling 
diversity. In contrast, DOE addresses input uncertainty primarily with 
the use of sensitivity scenarios. To determine whether the conclusions 
of the analysis are robust, DOE performed several sensitivity scenarios 
with more extreme versions of these input variables (e.g., high/low 
economic growth and energy price scenarios, alternative price trend 
scenarios, alternative mean lifetime scenarios). The relative 
comparison of potential standard levels in the analysis remains the 
same throughout these sensitivity scenarios, confirming that the 
conclusion of economic justification is robust despite some input 
uncertainty. Furthermore, DOE provides a range of statistics in the LCC 
spreadsheet, including median values and values at various percentiles 
for many intermediate variables, as well as the full data output table 
for all 10,000 samples. For example, the 25th and 75th percentiles of 
average LCC savings for all ELs for all product classes are available 
in the LCC spreadsheet. DOE also provides a distribution of impacts, 
including consumers with a net benefit, net cost, and not impacted by 
the rule in the LCC spreadsheet and in chapter 8 of the final rule TSD.
    DOE develops probabilities for as many inputs to the LCC analysis 
as possible, to reflect the distribution of impacts as comprehensively 
as possible. For example, DOE develops probabilities for building 
sampling, installation costs, lifetime, discount rate, and efficiency 
distribution, among other inputs. If there are insufficient data with 
respect to a specific input parameter to create a robust probability 
distribution, DOE will utilize a single input parameter. Such approach 
is neither arbitrary nor capricious; it is informed by the available 
data.
    The installation cost estimates are the result of a significant 
research and cite multiple sources, as discussed at length in section 
IV.F.2 and appendix 8D of the final rule TSD. DOE has incorporated 
feedback from various stakeholders and revised those costs for this 
final rule.
    Regarding deductible business expenses, DOE notes that equipment 
purchases would also be deductible, and that increased equipment 
expenses and lower operating expenses would have opposing effects on 
total deductions. Even if overall deductions were to decrease as a 
result of the rule, those savings could be easily invested in other 
parts of the business in order to have no net impact on a business' tax 
burden. Furthermore, DOE notes that the estimation of commercial 
discount rates accounts for the tax deductibility of the energy costs 
and capital investment depreciation and therefore the net present value 
of the future operating cost savings in the LCC analysis should already 
reflect that effect.
    DOE provides stakeholders with the opportunity to provide accurate 
data to represent a breadth of operating conditions, prices, and use 
cases. In the absence of stakeholder provided information, DOE makes a 
good-faith effort to collect reliable data from various sources and 
summarize assumptions on the missing parameters. The Monte Carlo 
simulation and its large number of samples (10,000 for each product 
class) ensures that the results converge to a representative average. 
For some inputs whose uncertainty is not well characterized, such as 
future equipment prices or economic growth conditions, DOE performed a 
series of sensitivity analyses to ensure that the results of the 
analysis are not strongly dependent on those inputs and that the 
conclusions of the analysis remain the same. As a result, DOE's 
conclusion of economic justification is robust to a broad range of 
sensitivity scenarios which capture the uncertainty inherent in 
economic projections.
    DOE acknowledges that in the LCC, there may be a handful of 
outcomes with large benefits or costs. Large outlier LCC savings, both 
positive and negative, may affect the average of LCC savings across the 
whole sample of impacted consumers. In particular, for medium ESWHs, 
there are some outcomes with LCC savings that are over 10 times the 
average across the whole sample. Therefore, for medium ESWHs, DOE 
considered an additional sensitivity analysis that eliminated these 
outcomes with large benefits. Specifically, DOE removed outcomes with 
positive LCC savings that exceed the absolute magnitude of the largest 
LCC costs, so that the final distribution of outcomes is bounded by 
similar extremes (positive and negative). This sensitivity removes 245 
outcomes out of 8,801 impacted consumers. The resulting average LCC 
savings in the sensitivity analysis are reduced to $581, compared to 
$859 in the reference case. Although the average LCC savings are 
reduced in this sensitivity analysis, they remain positive and there 
continue to be significant energy and environmental savings. DOE 
continues to conclude that the adopted standard level for medium ESWHs 
is economically justified even in this sensitivity analysis that 
eliminates large positive results.
    DOE further notes that such cases in the LCC, represented with 
outcomes resulting in large benefits or large costs, are likely to 
occur in the real-world as a reflection of the variability in the 
household characteristics across the United States. For example, a 
household with high usage (e.g., 5 plus occupants with frequent 
showering) located in an area with higher than average electricity 
rates, with lower than average installation costs (e.g., there is 
sufficient electrical, drainage, and space to accommodate the heat pump 
water heater) will result in that household seeing net benefits greater 
than the average population. Such a scenario is reflected in the model 
as a high-benefits case. While DOE conducted the sensitivity to test 
its conclusion that the standards adopted are economically justified 
even with conservative assumptions, DOE also believes that such high 
benefits or high costs cases reflect the realities of household 
characteristics across the United States.

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.\128\ 
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

[[Page 37872]]

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.
---------------------------------------------------------------------------

    \128\ 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.\129\
---------------------------------------------------------------------------

    \129\ 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 lifetime estimates. Annual historical shipments sources 
are: (1) Appliance Magazine; \130\ (2) the Air-Conditioning, Heating, 
and Refrigeration Institute (``AHRI'') website; \131\ (3) multiple AHRI 
data submittals; \132\ (4) the BRG Building Solutions 2022 report; (5) 
ENERGY STAR unit shipments data; \133\ (6) Oil Heating Magazine; \134\ 
and the 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.
---------------------------------------------------------------------------

    \130\ Appliance Magazine. Appliance Historical Statistical 
Review: 1954-2012. 2014. UBM Canon.
    \131\ 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 Dec. 1, 2023).
    \132\ 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.
    \133\ 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 Dec. 1, 2023).
    \134\ 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,135 136 Home Innovation Research Labs Annual Builder 
Practices Survey,\137\ RECS 2020, AHS 2021, and CBECS 2018 to estimate 
new construction water heater saturations by consumer water heater 
product class.\138\
---------------------------------------------------------------------------

    \135\ U.S. Census. Characteristics of New Housing from 1999-
2022. Available at www.census.gov/construction/chars/ (last accessed 
Dec. 1, 2023).
    \136\ U.S. Census. Characteristics of New Housing (Multi-Family 
Units) from 1973-2022. Available at www.census.gov/construction/chars/mfu.html (last accessed Dec. 1, 2023).
    \137\ 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 Dec. 1, 
2023).
    \138\ Note that DOE does not project housing regionally. New 
housing is therefore assumed to grow in the same regional 
distribution as the current data would suggest.
---------------------------------------------------------------------------

    DOE estimated shipments to the new owners' market based on residual 
shipments from the calculated replacement and new construction 
shipments compared to historical shipments in the last 5 years (2018-
2023 for this NOPR). DOE compared this with data from the Decision 
Analysts' 2002 to 2022 American Home Comfort Study \139\ 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).
---------------------------------------------------------------------------

    \139\ 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 Dec. 
1, 2023).
---------------------------------------------------------------------------

    For the preliminary analysis and NOPR, 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 acknowledges, however, 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's 
shipments projections account for impacts that are most likely in the 
relevant time frame. The assumptions are described in chapter 9 and 
appendix 9A of the final rule TSD. The changes result in a decrease in 
gas-fired storage 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 final rule, 
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 adopted 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 adopted 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 adopted 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.
    Gas Association Commenters advised that DOE should use State-level 
data rather than national data with differentiation between new and 
replacement market shares for each efficiency level in its analysis. 
Gas Association Commenters included specifics that they believe support 
this approach. (Gas Association Commenters, No. 1181 at pp. 35-37)

[[Page 37873]]

    DOE has taken into account differences between new and replacement 
market throughout its shipments analysis. DOE does not have detailed 
State-level data and so did not consider it in its analysis.
    GAAS commented that the shipment analysis should include historical 
and projections of shipments for water heaters broken down by end use 
applications and replacement versus new construction values. GAAS 
stated this would show that high efficiency options are gaining in 
market share without the need for more stringent energy efficiency 
standards. GAAS also commented that the Inflation Reduction Act 
(``IRA'') projections should be included in electric water heater sale 
projections. (GAAS, No. 1139 at p. 7)
    DOE's shipments analysis has considered historical and projected 
shipments disaggregated by applications and by replacement vs. new 
constructions markets using available data. Further details are 
available in chapter 9 and appendix 9A of the final rule TSD. DOE has 
accounted for recent trends in the adoption of high efficiency products 
in its analysis, including the impacts of recent policies incentivizing 
higher efficiency products in some jurisdictions.
    BWC asked for further clarification on what measures were taken by 
DOE to ensure that product shipments that may have been recorded in 
several of the referenced sources in section IV.G of this document were 
not accounted for multiple times, thus skewing the results of the data. 
(BWC, No. 1164 at p. 22)
    DOE carefully evaluated each data source and then cross-checked 
against multiple available data sources. DOE validated its estimates to 
avoid double-counting. Chapter 9 and appendix 9A provide a description 
of how data sources were utilized in the shipments analysis. In 
summary, some data sources provided an overview of the overall market 
(e.g., BRG data) whereas other data sources focused on a narrower 
subset (e.g., ENERGY STAR shipments) by efficiency level, capacity, or 
other characteristic. All of these data sources complement each other.
    BWC disagreed with DOE's estimate that heat pump water heaters 
currently account for approximately 8 percent of current sales in the 
United States. (BWC No. 1164 at p. 14) BWC disagreed with DOE's 
assumption that small electric storage water heaters make up 11 percent 
of the total market for electric storage water heaters with capacities 
ranging from 20 to 55 gallons and expressed that the actual figure is 
much higher. BWC commented that it is prepared to discuss the basis for 
this belief in a confidential conversation with DOE. (BWC, No. 1164 at 
p. 15)
    DOE derived its estimates based on available data sources of 
historical shipments and markets shares as discussed in further detail 
in chapter 9 and appendix 9A. DOE clarifies that its estimate of small 
electric storage water heaters are specifically for those that meet the 
definition of the small electric storage water heater product class, 
based on the distribution of capacities and first-hour ratings 
available in the data sources and model databases. Some smaller 
capacity storage water heaters may not meet the definition of small 
electric storage water heaters. DOE also clarifies that its estimate of 
market shares at various efficiency levels (including heat pump water 
heaters), based on the data sources discussed in chapter 8 and appendix 
8I, are presented for the first year of compliance (2030) and account 
for any recent historical trends. By 2030, DOE estimates that the heat 
pump water heater market share of the electric storage water heater 
market will exceed 10 percent.
    EEI commented that DOE projects electric storage water heater (20-
55 gallons except small electric storage water heaters) shipments 
dropping by well over 30 percent in the first year and never recovering 
compared to the ``no new standards'' case under the proposed rule, and 
this type of demand destruction could lead manufacturers to invest in 
and increase production of other less-efficient products. (EEI, No. 
1198 at p. 4)
    DOE acknowledges that some consumers may opt to change products, 
from electric storage water heaters to small electric storage water 
heaters, in response to the standard. This market dynamic is discussed 
in more detail in section IV.G.1.a of this document. Although DOE 
estimates that approximately 30 percent of electric storage water 
heater shipments will shift to small electric storage water heaters in 
the amended-standards case, this is not demand destruction as the 
commenter as characterized. This is a shift in consumer demand to an 
alternate product that is currently available. DOE acknowledges that 
that this shift will result in lower energy savings than if no 
consumers switched products, and this is accounted for in the analyses. 
DOE further notes that at the adopted standard level, the minimum 
efficiency requirement for small electric storage water heaters is 
still achievable with electric resistance heating technology; 
therefore, for this product class, manufacturers will continue to 
produce similar water heaters to those that are produced today. While 
there will be an increase in production for small electric water 
heaters to meet this increased demand, there will also be an increase 
in the production of efficient water heaters to meet the demand of the 
rest of the electric storage water heater market.
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 (see section IV.F.10 of this 
document), 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.\140\ 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 and <=55 gal, excluding small ESWHs only; and (2) A 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 storage volume and draw pattern to sampled consumer water 
heaters based on data from RECS 2020 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

[[Page 37874]]

to installing a heat pump water heater. Table IV.27 and Table IV.28 
show the resulting estimated shipment market share impacted for each 
scenario. Additional details of this analysis can be found in chapter 9 
and appendix 8D of the TSD.
---------------------------------------------------------------------------

    \140\ See Rheem's booster instantaneous water heater, which can 
increase the availability of hot water for storage tank water 
heaters at www.rheem.com/innovations/innovation_residential/water-heater-booster/.
[GRAPHIC] [TIFF OMITTED] TR06MY24.042

[GRAPHIC] [TIFF OMITTED] TR06MY24.043

    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 
final rule TSD for further details regarding how DOE estimated 
switching between various electric water heater options.
    BWC commented that the findings presented in appendix 9A of the 
July 2023 NOPR TSD do not align with its understanding of what has 
occurred in the residential water heater market since the most recent 
rulemaking on these products took effect in 2015. BWC also questioned 
how DOE could have accounted for grid-enabled water heater shipments in 
this appendix when the BRG report, referenced as the source for this 
appendix's findings, does not account for shipments of these types of 
products. For these reasons, BWC would welcome an opportunity to 
discuss this matter further confidentially with DOE. (BWC, No. 1164 at 
p. 22)
    DOE derived its estimates based on multiple available data sources 
and shipments model. The BRG report is only one data source. Other 
sources include AHRI shipments data available online, shipments data 
submitted confidentially to DOE, shipment estimates from ENERGY STAR, 
EIA's Annual Electric Power Industry Report, and estimates from trade 
magazines, as discussed in chapter 9. DOE used the combination of all 
these data to estimate shipments of the smaller product classes, such 
as electric storage water heaters greater than 55 gallons. DOE also 
clarifies that it did not propose or adopt standards for grid-enabled 
water heaters and therefore they were not specifically considered in 
the analysis.
    BWC recommended that DOE utilize information that is specific to 
the residential water heater market in supporting its claims relative 
to consumer preferences. In the absence of such information, BWC asked 
that DOE take a proactive approach by working directly with 
manufacturers, trade associations, consumer advocates, and other 
knowledgeable stakeholders to collect information that is timely and 
relevant to the products that are subject to this rulemaking through 
confidential interviews and disaggregated surveys. (BWC, No. 1164 at p. 
24)
    DOE has considered available information and data sources, 
including interviews with manufacturers, industry market research 
reports, confidentially submitted data, and feedback from an industry 
consultant. There are, however, no specific data or studies on consumer 
decision-making preferences that DOE is aware of, specifically with 
respect to the water heater market, other than what is revealed by 
shipments data and the market share of various products currently 
available. DOE derived its estimates of efficiency distributions based 
on these market data. Regarding DOE's estimates of consumer preferences 
and market failures, these are based on a wide body of economics 
literature as discussed in more detail in section IV.F.8 of this 
document.
b. Impact of Repair vs. Replace
    DOE estimated a fraction of consumer water heater replacement 
installations

[[Page 37875]]

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.\141\ (``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.
---------------------------------------------------------------------------

    \141\ The NIA accounts for impacts in the United 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 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 final rule. Discussion of these inputs and methods 
follows the table. See chapter 10 of the final rule TSD for further 
details.
[GRAPHIC] [TIFF OMITTED] TR06MY24.044

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 final rule 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

[[Page 37876]]

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 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 requirements such as EL 3 and above for gas-fired storage 
water heaters and EL 2 and above for electric storage water heaters 
(>=20 gal Veff >55 gal).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).
    BWC cautioned DOE against using ENERGY STAR performance criteria 
data to assume growth in market shares for higher efficiency water 
heaters after 2030 in the no-new-standards case. BWC noted that ENERGY 
STAR's Residential Water Heater Specification 4.0 (effective March 29, 
2022, to April 18, 2023) incentivized the purchase of high efficiency 
water heater products, such as heat pump water heaters, but the 
penetration rate for these products in the market remains low, as 
ENERGY STAR's 2022 Unit Shipment and Market Penetration Report Summary 
reports only a 3-percent market penetration for these products. In 
contrast, Figure 10.2.2 of the NOPR TSD assumes heat pump water heaters 
making up 11 percent of the market by 2030 in the no-new-standards 
case, which appears unlikely when considering the information released 
by ENERGY STAR cited above. (BWC, No. 1164 at p. 3)
    DOE derived its estimates based on multiple available data sources 
and shipments model, not just ENERGY STAR shipment data. DOE's 
estimated market share of higher efficiency equipment is based on these 
data as well as on existing policies and incentives that drive a higher 
adoption of higher efficiency equipment in the no-new-standards case, 
as discussed in more detail in appendix 8I and 9A. DOE notes that if 
the analysis assumed a lower market share projection of heat pump water 
heaters in the no-new-standards case, this would result in a higher 
estimate of energy savings from the adopted standards, which would only 
further support DOE's conclusion of economic justification.
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.\142\ This review concluded that the econometric and 
quasi-experimental studies suggest a mean value for the direct rebound 
effect for household water heating of around 10 percent. DOE also 
examined a 2012 ACEEE paper \143\ and a 2013 paper by Thomas and 
Azevedo.\144\ Both of these publications examined the same studies that 
were reviewed by Sorrell, as well as Greening et al.,\145\ 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 that 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.146 147 148 149 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.
---------------------------------------------------------------------------

    \142\ 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 Dec. 1, 2023).
    \143\ 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 Dec. 1, 
2023).
    \144\ 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 Dec. 1, 2023).
    \145\ 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 Dec. 1, 2023).
    \146\ See www.eia.gov/outlooks/aeo/nems/documentation/residential/pdf/m067(2020).pdf (last accessed Dec. 1, 2023.
    \147\ 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 Dec. 1, 2023).
    \148\ 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 Dec. 1, 2023).
    \149\ 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 Dec. 1, 2023).
---------------------------------------------------------------------------

    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

[[Page 37877]]

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 \150\ that EIA uses 
to prepare its Annual Energy Outlook. The FFC factors in corporate 
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 final rule TSD.
---------------------------------------------------------------------------

    \150\ For more information on NEMS, refer to The National Energy 
Modeling System: An Overview 2009, DOE/EIA-0581(2009), October 2009. 
Available at www.eia.gov/forecasts/aeo/index.cfm (last accessed Dec. 
1, 2023).
---------------------------------------------------------------------------

    EEI commented that the fossil fuel equivalency methodology, 
employed in DOE's impact assessment of proposed changes to efficiency 
standards, was developed in an earlier era when the penetration of 
renewable energy generation was low. EEI commented that continuing to 
apply fossil fuel equivalency factors leads to the false conclusion 
that renewable energy generation has the same primary energy losses as 
fossil generation and that these energy losses represent similar 
economic loss. EEI stated that EIA is moving to the captured energy 
approach in all of its analyses as of June 2023, and DOE should follow 
EIA's lead and update its methodology as soon as possible to create 
more realistic estimates of primary energy savings and electricity 
sector emissions reductions. (EEI, No. 1198 at pp. 6-8)
    As previously mentioned, DOE converts electricity consumption and 
savings to primary energy using annual conversion factors derived from 
the EIA's AEO2023. Traditionally, EIA has used the fossil fuel 
equivalency approach to report noncombustible renewables' contribution 
to total primary energy. 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 approaches for converting renewable electricity to a 
common measure of primary energy, but used the fossil fuel equivalency 
approach in AEO2023 and other reporting of energy statistics used in 
this final rule. DOE contends that it is important for it to maintain 
consistency with AEO2023 in DOE's accounting of primary energy savings 
from energy efficiency standards.
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 used constant 
prices as the default price assumption to project future consumer water 
heater prices. However, DOE also developed consumer water heater price 
trends based on historical PPI data. DOE applied the same trends to 
project prices for each product class at each considered efficiency 
level as a sensitivity analysis. DOE's projection of product prices is 
described in appendix 10C of the final rule 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) 
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 final rule TSD.
    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 energy price changes in the Reference case from 
AEO2023, which has an end year of 2050. To estimate price trends after 
2050, the 2046-2050 average was used for all years. 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 10C of the final rule 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 final rule TSD for details on DOE's treatment 
of the monetary valuation 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 
final rule, 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.\151\ 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.
---------------------------------------------------------------------------

    \151\ U.S. Office of Management and Budget. Circular A-4: 
Regulatory Analysis. Available at www.whitehouse.gov/omb/information-for-agencies/circulars (last accessed Mar. 5, 2024). DOE 
used the prior version of Circular A-4 (September 17, 2003) in 
accordance with the effective date of the November 9, 2023 version. 
Available at https://www.whitehouse.gov/wp-content/uploads/legacy_drupal_files/omb/circulars/A4/a-4.pdf (last accessed Dec. 1, 
2023).
---------------------------------------------------------------------------

    Atmos Energy argued that increased efficiency in water heaters 
could lead to an increase in water usage which could further drought in 
southern and western states. Atmos Energy argued that a full evaluation 
of rebound effects of the proposal should be conducted and that 
increased water usage should be calculated and evaluated as an 
environmental cost of the proposal. (Atmos Energy, No. 1183 at p. 5)
    DOE has considered rebound effects in its analysis. DOE notes that 
the impacts of changes in water usage on regional water supply are not 
captured

[[Page 37878]]

within the scope of DOE's standards analysis.

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 final rule, 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 2020 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 FR 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 and less likely to be homeowners. 
DOE notes that in these cases, the landlord purchases the equipment and 
may pay the gas bill as well. RECS 2020 includes data on whether a 
household pays for the gas bill, allowing DOE to categorize households 
appropriately in the analysis.\152\ 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).
---------------------------------------------------------------------------

    \152\ RECS 2020 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.
    BWC cautioned DOE against relying as heavily as it does in this 
proposal on state, local, and/or utility rebate programs to decrease 
the upfront installation costs for condensing gas-fired water heaters, 
as well as heat pump water heaters. While recognizing the existence of 
many rebate programs today, BWC questions how many of these rebates 
will continue in place if the Department finalizes this proposal. This 
is therefore a scenario BWC urged DOE to account for in its subgroup 
analysis as BWC believes it will reveal cost burdens that are much 
higher on the low-income households than what is presently assumed in 
this NOPR. (BWC, No. 1164 at p. 19). For consumers in subsidized 
housing, BWC urged the Department to consider two realistic outcomes 
regarding product rebates that are designed to cover upfront 
installation costs. The first is that many or all third parties will 
stop offering these rebates once federal, state, and/or local 
regulatory bodies require the use of high-efficiency appliances. (BWC 
No. 1164 at p. 26) The second is the cost that these consumers will 
experience when their highly efficient product reaches the end of its 
useful life. Many rebate programs are designed to assist consumers with 
project costs associated with fuel-switching or upgrading a lower 
efficiency product with a more expensive, higher efficiency 
counterpart. However, many if not most of these rebate programs do not 
apply to installations where a highly efficient product is undergoing a 
like-for-like replacement. (BWC No. 1164 at p. 27)
    Rheem argued that IRA will not impact water heaters sold at the 
efficiency levels proposed by DOE; therefore, low-income households 
will not benefit from 25C tax credits. Rheem pointed out that Energy 
Star specification has recently been updated and recommended that DOE 
address the new levels. This includes that Energy Star has indicated 
that they will sunset gas-fired water heater specification and 
therefore should not be used to determine uptake of higher efficiency 
gas-fired WH. (Rheem, No. 1177 at pp. 16-17).
    In response to the above comments regarding rebates, DOE clarifies 
that it does not rely on the existence of rebate programs to justify 
the energy conservation standards. DOE's installation costs are 
estimated based on labor and material costs, as described in chapter 8 
and appendix 8D, without any rebates. DOE merely notes that the 
potential existence of such programs in the future would only improve 
the economic justification of this rule.
    Health Advocates and Joint Advocates of Energy Efficiency argued 
that 67 percent of low-income households face a high-energy burden 
where they must spend 3 times more of their income on energy costs 
compared to median spending (8.1 percent vs 2.3 percent). Health 
Advocates argued that renters (disproportionately low-income 
households) would benefit from this rule because landlords have no 
incentive to install efficient water heaters as tenants usually pay the 
energy bills. (Health Advocates, No. 1179 at p. 2; Joint Advocates of 
Energy Efficiency, No. 1165 at p. 2) In response, DOE notes that it has 
considered the impacts on low-income households. Low-income homeowners 
(including owners of manufactured homes) are more likely to have 
smaller water heaters that either are not subject to amended standards 
(in the case of small ESWHs) or have modest incremental costs. Low-
income renters are unlikely to bear the equipment and installation 
costs of replacing their water heater but

[[Page 37879]]

are more likely to pay energy costs and therefore see operating 
benefits from the rule. DOE has evaluated the full distribution of 
impacts in the LCC analysis, including consumers that experience a net 
cost and consumers that experience a net benefit, and concludes that on 
the whole, the rule is economically justified.
    Gas Association Commenters argued that if better regional market 
share data were used, regions with low or negative LCC savings would 
impact the overall outcome differently. Gas Association Commenters 
included tables in their submitted comment summarizing these argued 
regional impacts. Gas Association Commenters also argued that DOE is 
missing subsets of low-income households by only using those who are 
most likely to directly pay utility bills. They stated that utilities 
can also be a function of rent where higher utility costs can still be 
passed on to the end user. (Gas Association Commenters, No. 1181 at p. 
6 and pp. 23-25) DOE acknowledges that there may be some regional 
variation in LCC impacts and these results are available in the LCC 
spreadsheet. DOE further acknowledges that some fraction of consumers 
will experience a net cost, as presented in the LCC. However, DOE 
concludes that on the whole, the rule continues to be economically 
justified, with the incorporation of a much larger RECS 2020 sample. 
The average LCC savings remain positive. With respect to low-income 
households, DOE took into account both scenarios where the households 
do or do not directly pay their utility bills, and these are included 
in the low-income subgroup analysis as discussed in chapter 11.
    NRECA commented that the subgroup is too narrowly defined to 
include low-income homeowners and urged DOE to account for consumers 
near but above the poverty level who can also experience a high burden 
when the installation cost for a heat pump water heater easily takes up 
10 percent of their annual income. NRECA also noted that manufactured 
housing comprises 25 percent or more of the co-op's residential housing 
stock and that these same homes present challenges for heat pump water 
heater adoption due to space constraints. NRECA suggested that DOE 
should improve its analysis by using low-and-moderate income instead of 
poverty-level in the subgroup and assigning proportionally higher 
occurrences of expensive installations to this subgroup. (NRECA, No. 
1127 at pp. 5-6) In contrast, NYSERDA commented that the proposed 
standard will bring significant benefits to low-and-moderate income 
households and to disadvantaged communities. (NYSERDA, No. 1192 at p. 
3) DOE notes that the low-income subgroup is specifically defined for 
households meeting poverty thresholds, as defined in chapter 11. While 
households slightly above these thresholds are not included in the low-
income subgroup analysis, they are part of the overall LCC analysis. On 
the whole, DOE concludes that the rule is economically justified for 
both the overall LCC consumer sample as well as the low-income 
subgroup. Households that do not meet the low-income threshold but are 
nonetheless energy insecure are likely to experience impacts that fall 
in between the overall LCC results and the low-income subgroup results, 
which would still be economically justified. As noted above, energy 
insecure homeowners with smaller water heaters will either experience 
smaller incremental equipment costs on average or have water heaters 
not subject to amended standards, and energy insecure renters would 
benefit similarly to low-income renters.
    ECSC argued that heat pump water heater installations will be 
hindered by lack of contractor availability in rural areas. (ECSC, No. 
1185 at pp. 1-2) Regarding contractor availability, DOE notes that 
while heat pump water heaters are not as common today, they will become 
very common by the compliance date of the rule. Many contractors at 
present are able to install different types of water heaters, including 
heat pump water heaters. At the adopted standard level, the existing 
market for small electric storage water heaters is preserved, which 
reduces the level of contractor training and investment needed than if 
higher standards were adopted for all electric storage water heaters. 
While DOE acknowledges there is a ramp up in contractor training 
required by 2030, the adopted standard level allows for a more 
incremental transition to heat pump technology. Furthermore, DOE notes 
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.
    BWC disagreed with the Department excluding any costs or benefits 
that are accrued by a landlord when analyzing impacts to the low-income 
household subgroup. While BWC understood that these costs and benefits 
are not imposed directly on renters, they will indirectly lead to 
impacts on renters that DOE should account for, such as increased rent 
rates resulting from landlords attempting to recoup the initial project 
installation costs, as well as increased maintenance costs likely to 
result for the installation of a higher efficiency product. (BWC No. 
1164 at p. 26) Armada argued that DOE failed to acknowledge that 
landlords will be forced to increase rent or other costs to cover the 
purchase and installation of more efficient options, and a landlord 
will have to dedicate a bedroom to a water heater or reconfigure the 
duct-work of the property to accommodate the water heater. Armada 
argued that these are major changes that will harm residents the most, 
and these proposed efficiency standards which will effectively mandate 
heat pump technology will only compound the existing affordable housing 
issue. (Armada, No. 1193 at pp. 6-7) DOE finds no evidence that 
significant rental cost increases would occur. Rental prices are 
largely dictated by supply and demand of housing in individual 
locations, not the sum of equipment costs in those rentals, such that 
two similar rentals could have widely differing prices in different 
cities. Furthermore, a landlord would be responsible for replacing an 
end-of-life water heater in the no-new-standards case as well yet the 
rent is unlikely to increase simply because of this regular 
maintenance. The installation costs estimated in the LCC already 
include any potential replacement of venting for gas-fired water 
heaters and other installation costs for ESWHs, however there is never 
a need to ``dedicate a bedroom'' to a new water heater. Additionally, 
even if there are significant extra costs for the installation of a 
heat pump water heater (see section IV.F.2.d of this document), the 
analysis includes the potential to switch to a small ESWH for consumers 
with lower hot water demand as an alternative to minimize installation 
costs (see section IV.G.1 of this document). Finally, even if a 
landlord were to fully pass on the incremental costs due to amended 
standards, those costs would presumably be spread out over a monthly 
rent spanning many years, possibly the lifetime of the water heater, 
resulting in relatively small monthly rent increases. It is for these 
reasons that the low-income subgroup analyzes impacts assuming renters 
do not bear installation costs. However, as described in section IV.F 
of this document, for the overall LCC analysis, DOE makes the 
simplifying assumption that all installation and equipment costs are 
paid for by the consumer of the equipment, including renters. 
Therefore, the main LCC results do assume that

[[Page 37880]]

landlords pass on all costs and yet the analysis still finds that the 
rule is economically justified.
    For consumers in subsidized housing, BWC urged the Department to 
consider two realistic outcomes regarding product rebates that are 
designed to cover upfront installation costs. The first is that many or 
all third parties will stop offering these rebates once federal, state, 
and/or local regulatory bodies require the use of high-efficiency 
appliances. (BWC No. 1164 at p. 26) The second is the cost that these 
consumers will experience when their highly efficient product reaches 
the end of its useful life. Many rebate programs are designed to assist 
consumers with project costs associated with fuel-switching or 
upgrading a lower efficiency product with a more expensive, higher 
efficiency counterpart. However, many if not most of these rebate 
programs do not apply to installations where a highly efficient product 
is undergoing a like-for-like replacement. (BWC No. 1164 at p. 27)
    DOE clarifies that the analysis does not assume that installation 
costs are reduced by rebates or incentives. Rather, the analysis uses 
these existing programs as part of the shipments projection and the 
projection of market shares at different efficiency levels in the no-
new-standards case. This merely characterizes the market up to the 
compliance date of the adopted standards.
2. Senior-Only Households
    Senior-only households are households with occupants who are all at 
least 65 years of age. RECS 2020 includes information on the age of 
household occupants, allowing for the identification of senior-only 
households from the sample. Senior-only households comprised 23.5 
percent of the country's households. In estimating the LCC impacts to 
senior-only households, it is assumed that any residual value of a 
long-lived product is capitalized in the value of the home.
3. Small Business Subgroup
    DOE identified small businesses in CBECS 2018 using threshold 
levels for maximum number of employees within each building principal 
building activity. DOE received no comments regarding small businesses 
impacts relevant to products within the scope of this final rule.

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 
direct 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 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. To capture the uncertainty relating to 
manufacturer pricing strategies following amended standards, the GRIM 
estimates a range of possible impacts under different manufacturer 
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 final rule 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 heater 
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 heater 
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 heater 
manufacturing industry, including company filings of form 10-K from the 
SEC,\153\ corporate annual reports, the U.S. Census Bureau's Quarterly 
Survey of Plant Capacity Utilization,\154\ U.S. Census Bureau's Annual 
Survey of Manufactures (``ASM''),\155\ and reports from D&B 
Hoovers.\156\
---------------------------------------------------------------------------

    \153\ U.S. Securities and Exchange Commission. Company Filings. 
Available atwww.sec.gov/edgar/searchedgar/companysearch.html (last 
accessed Aug. 2, 2022).
    \154\ The U.S. Census Bureau. Quarterly Survey of Plant Capacity 
Utilization. Available at www.census.gov/programs-surveys/qpc/data/tables.html (last accessed Aug. 2, 2022).
    \155\ U.S. Census Bureau's Annual Survey of Manufactures: 2018-
2021 (Available at: www.census.gov/programs-surveys/asm/data/tables.html) (last accessed January 18, 2024).
    \156\ The D&B Hoovers login is available at app.dnbhoovers.com 
(last accessed Dec. 1, 2023).
---------------------------------------------------------------------------

    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.
    In Phase 3 of the MIA, DOE conducted structured, detailed

[[Page 37881]]

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. 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, 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 
of this document, ``Review under the Regulatory Flexibility Act'' and 
in chapter 12 of the final rule TSD.
2. Government Regulatory Impact Model and Key Inputs
    DOE uses the GRIM to quantify the changes in cash flow due to new 
or 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, manufacturer 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 new or 
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. The GRIM results are presented 
in section V.B.2 of this document. Additional details about the GRIM, 
the discount rate, and other financial parameters can be found in 
chapter 12 of the final rule TSD.
a. Manufacturer Production Costs
    Manufacturing more efficient products is typically more expensive 
than manufacturing baseline products 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 based on the feedback DOE received. For a complete 
description of the MPCs, see section IV.C of this document and chapter 
5 of the final rule 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 section IV.G of this document and chapter 9 
of the final rule 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 manufacturers 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 84 percent of sales 
of consumer water heaters covered by this rulemaking. 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 estimates 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 set up a production facility. The investment figures included 
capital required for manufacturing equipment, tooling, conveyors, and 
facility. DOE then modeled the incremental investment required by more 
stringent standards. DOE multiplied the incremental investment by the 
number of ``major'' (i.e., high-volume) manufacturers. These investment 
levels aligned with feedback from interviews. Additionally, DOE 
determined that smaller manufacturers would have lower investment 
levels given their lower production volumes, relative to ``major'' 
manufacturers, and accounted for those lower investments for 
manufacturers with lower market share. DOE updated its conversion cost 
estimates for the product classes analyzed in this final rule by 
incorporating refined equipment, tooling, conveyor, and space estimates 
generated from the product teardown analysis, but otherwise maintained 
its

[[Page 37882]]

conversion cost methodology from the July 2023 NOPR.
    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 
figures used in the GRIM can be found in section V.B.2 of this 
document. For additional information on the estimated product and 
capital conversion costs, see chapter 12 of the final rule 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 analyzed product class 
and efficiency level. Modifying these manufacturer markups in the 
standards case yields different sets of impacts on manufacturers. For 
the MIA, DOE modeled two standards-case manufacturer 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 manufacturer 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'' 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 MPCs increase with 
efficiency, this scenario implies that the per-unit dollar profit will 
increase. DOE estimated gross margin percentages of 24 percent for the 
gas-fired storage water heaters, 22 percent for electric storage water 
heaters, and 23 percent for oil-fired storage water heaters.\157\ 
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.
---------------------------------------------------------------------------

    \157\ 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.
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    Under the preservation of operating profit scenario, DOE modeled a 
situation in which manufacturers are not able to increase per-unit 
operating profit in proportion to increases in MPCs. 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 scenarios 
is presented in section V.B.2.a of this document.
3. Discussion of MIA Comments
a. Conversion Costs
    In response to the July 2023 NOPR, BWC submitted written comments 
about the accuracy of DOE's conversion cost estimates. BWC stated that 
it continues to appreciate DOE considering conversion costs as part of 
its analysis. However, BWC asserted that the industry conversion costs 
DOE estimated in the July 2023 NOPR are understated and far lower than 
the cost that manufacturers will realistically incur. BWC offered to 
discuss these findings during confidential conversation with the 
consultants that DOE engaged for this rulemaking. (BWC, 1164 at pp. 4-
5)
    AHRI asserted that under the standards proposed in the July 2023 
NOPR, manufacturers would need to produce exponentially more heat pump 
water heaters, requiring many manufacturers to build new plants, 
retrofit existing lines, or both. Additionally, AHRI expressed concern 
that supply chains and labor shortages could compound these 
difficulties. (AHRI, No. 1167 at p. 12)
    To evaluate the level of conversion costs industry would likely 
incur to comply with potential amended energy conservation standards, 
DOE relied on feedback from confidential manufacturer interviews and 
estimates of equipment, tooling, conveyor, and space from the 
engineering and product teardown analyses. DOE interviewed a range of 
manufacturers in advance of the July 2023 NOPR, which together account 
for approximately 84 percent of U.S. sales of consumer water heaters 
covered by this final rule. For this final rule, DOE reexamined its 
conversion cost estimates from the July 2023 NOPR. For all product 
classes analyzed in this final rule, DOE updated its conversion cost 
estimates by incorporating refined equipment, tooling, conveyor, and 
space estimates generated from the product teardown analysis, but 
otherwise maintained its conversion cost methodology from the July 2023 
NOPR. See section IV.J.2.c of this document and chapter 12 of the final 
rule TSD for additional details on DOE's conversion cost methodology 
and investment estimates.
    In response to the July 2023 NOPR, AHRI stated that it supported 
the inclusion of amortization of product conversion costs under 
standards into the projected MSP in a recent rulemaking for microwave 
ovens, and urges DOE to use this methodology in all rulemakings.\158\ 
AHRI further asked DOE to explain the justification for amortizing 
conversion costs in one instance but not in all. (AHRI, No. 1167 at pp. 
20-21)
---------------------------------------------------------------------------

    \158\ Technical Support Document: Energy Efficiency Program For 
Commercial And Industrial Equipment: Microwave Ovens. Available at 
www.regulations.gov/document/EERE-2017-BT-STD-0023-0022.
---------------------------------------------------------------------------

    DOE models different standards-case manufacturer markup scenarios 
to represent uncertainty regarding the potential impacts on prices and 
profitability for manufacturers following the implementation of amended 
energy conservation standards. The analyzed manufacturer markup 
scenarios vary by rulemaking as they are meant to reflect the potential 
range of financial impacts for manufacturers of the specific covered 
product or equipment. For the July 2023 NOPR, DOE applied a 
preservation of gross margin percentage scenario to reflect an upper 
bound to industry profitability under amended standards and a 
preservation of operating profit scenario to reflect a lower bound of 
industry profitability under amended standards. 88 FR 49058, 49128. For 
consumer water heaters, manufacturing more efficient products is 
generally more expensive than manufacturing baseline or minimally 
efficient products, as reflected by the MPCs estimated in the 
engineering analysis (see section IV.C.1.e of this document). Under the 
preservation of gross margin scenario for consumer

[[Page 37883]]

water heaters, incremental increases in MPCs at higher efficiency 
levels result in an increase in per-unit dollar profit per unit sold. 
As shown in Table V.18, under the preservation of gross margin 
scenario, the standards case INPV increases relative to the no-new-
standards case INPV for the adopted TSL (i.e., TSL 2). This implies 
that the increase in cashflow from the higher MSP is outweighed by the 
estimated conversion costs at the adopted level. In other words, under 
the preservation of gross margin scenario, the consumer water heater 
industry recovers conversion costs incurred as a result of amended 
standards. The approach used in the microwave ovens rulemaking (i.e., a 
conversion cost recovery scenario) modeled a scenario in which 
manufacturers recover investments through an increase in their 
manufacturer markup. 88 FR 39912, 39935. DOE implemented this scenario 
in the microwave ovens GRIM by calibrating the standards case 
manufacturer markups for each product class at each efficiency level to 
cause manufacturer INPV in the standards cases to be equal to the INPV 
in the no-new-standards case. Thus, if DOE applied a conversion cost 
recovery scenario in this rulemaking, the potential change in INPV at 
the adopted TSL would be within the range of estimated impacts 
resulting from the preservation of gross margin scenario and 
preservation of operating profit scenario. As such, DOE maintained the 
two standards-case manufacturer markup scenarios used in the July 2023 
NOPR for this final rule as they most appropriately reflect the upper 
(least severe) and lower (more severe) impacts to manufacturer 
profitability under amended standards.
b. Cumulative Regulatory Burden
    In response to the July 2023 NOPR, AHRI submitted written comments 
regarding cumulative regulatory burden. AHRI urged DOE to consider the 
high volume of regulatory activity that directly affects manufacturers 
of consumer water heaters and expressed concern that DOE was rushing to 
publish recent rulemakings, risking significant revision that will 
prolong uncertainty, confuse consumers, and potentially undermine 
broader policy goals. AHRI cited standards and test procedure 
rulemakings in regards not only to consumer water heaters, but also to 
consumer boilers, consumer pool heaters, a final rule pertaining to 
standards for commercial water heaters, small electric motors, 
commercial and industrial pumps, commercial and multifamily high-rise 
and low-rise residential, as well as low and zero NOx actions by 
California Air Resources Board (``CARB'') and individual air quality 
management districts, State building code changes, ENERGY STAR 
potentially setting a max-tech requirement for gas storage water 
heaters, and Federal and State refrigerant regulations as regulatory 
actions that impact consumer water heater manufacturers. (AHRI, No. 
1167 at pp. 7-9)
    In response to the July 2023 NOPR, BWC commented that the impact of 
cumulative regulatory burden experienced by manufacturers is not 
limited to conversion costs, but also to the preparations manufacturers 
must undergo in order to respond to proposed rules. BWC further stated 
that DOE has promulgated several major rulemakings that will directly 
impact the products that BWC manufactures, in addition to actions 
undertaken by other governments and programs, and that the ability of 
manufacturers to draw on outside resources for assistance will be 
severely limited by the concurrent needs of many manufacturers across 
rulemakings, particularly in the case of third-party laboratories. BWC 
stated that due to the burden this rulemaking will place on third-party 
labs, as well as the general burden of multiple concurrent ongoing 
regulatory actions, BWC strongly disagreed with DOE's decision not to 
consider test rulemakings as part of its analysis. (BWC, No. 1164 at 
pp. 24-26) BWC also stated that, due to concurrent regulatory actions 
regarding energy efficiency at both the State and Federal levels, it 
disagreed with DOE's conclusion in section VI.B.5 of the July 2023 NOPR 
that there are no rules or regulations that duplicate, overlap, or 
conflict with this proposed rule and encouraged DOE to account for all 
of these issues, ideally allowing manufacturers more time to review and 
respond to DOE rulemakings when requested. (BWC, No. 1164 at p. 24)
    DOE analyzes cumulative regulatory burden pursuant to section 13(g) 
of Appendix A. 10 CFR part 430, subpart C, appendix A, section 13(g); 
10 CFR 431.4. DOE notes some of the rules (e.g., consumer boilers) 
detailed by AHRI are not finalized. Regulations that are not yet 
finalized are not considered as cumulative regulatory burden, as the 
timing, cost, and impacts of unfinalized rules are speculative. 
However, to aid stakeholders in identifying potential cumulative 
regulatory burden, DOE does list rulemakings that have proposed rules, 
which have tentative compliance dates, compliance levels, and 
compliance cost estimates. The results of this analysis can be found in 
section V.B.2.e of this document. As shown in Table V.21, DOE analyzed 
the consumer boilers, consumer pool heaters, and commercial water 
heaters rulemakings as part of its cumulative regulatory burden 
analysis. Regarding small electric motors, DOE published a notice of 
proposed determination (``NOPD'') on February 6, 2023. As such, DOE 
would not consider the small electric motors rulemaking as contributing 
to cumulative regulatory burden since DOE did not propose to amend its 
energy conservation standards. 88 FR 7629. Regarding commercial and 
industrial pumps, DOE similarly would not consider the commercial and 
industrial pumps rulemaking as contributing to cumulative regulatory 
burden since DOE did not propose to amend its energy conservations 
standards.
    Regarding AHRI's comment about ultra-low NOX and zero 
NOX regulations, DOE notes that in its analysis of 
cumulative regulatory burden, DOE considers Federal, product specific 
regulations that have compliance dates within 3 years of one another. 
DOE is not aware of any Federal or State ultra-low NOX or 
zero NOX regulations specific to consumer water heaters with 
compliance dates within the 7-year cumulative regulatory burden 
timeframe (2027-2033).\159\ DOE notes that certain localities (i.e., 
California Air Districts) have adopted regulations requiring ultra-low 
NOX consumer water heaters. DOE accounts for the portion of 
ultra-low NOX shipments in its analysis. DOE notes that a 
California Air District--the Bay Area Air Quality Management District 
Board of Directors--has adopted amendments to eliminate NOX 
emissions from certain gas-fired consumer water heaters beginning in 
2027.\160\ There are currently no natural gas-fired water heaters on 
the market that would meet the zero NOX standards, though 
manufacturers may choose to develop them. Regarding building code 
changes in states

[[Page 37884]]

requiring heat pump water heating, DOE's accounts for increased 
incentives for higher efficiency equipment and electrification efforts 
in its shipments analysis. See section IV.H.1 of this document for 
additional information on product efficiency trends.
---------------------------------------------------------------------------

    \159\ California Air Resources Board (``CARB'') has stated that 
it is committed to explore developing and proposing zero-emission 
GHG standards for new space and water heaters sold in California as 
part of the 2022 State Strategy for the State Implementation Plan 
adopted in September 2022. However, at the time of issuance, CARB 
has not proposed or adopted such standards for consumer water 
heaters. Additional information is available at: ww2.arb.ca.gov/our-work/programs/zero-emission-appliance-standards/about. (Last 
accessed Nov. 29, 2023).
    \160\ Available at: www.baaqmd.gov/~/media/dotgov/files/rules/
reg-9-rule-4-nitrogen-oxides-from-fan-type-residential-central-
furnaces/2021-amendments/documents/20230315_rg0906-
pdf.pdf?rev=436fcdb037324b0b8f0c981d869e684d≻_lang=en.
---------------------------------------------------------------------------

    Regarding Federal and State refrigerant regulations, EPA published 
a final rule pertaining to the phaseout of HFC refrigerants with high 
global warming potential (``GWP'') in specific sectors or subsectors on 
October 24, 2023. 88 FR 73098. However, EPA does not adopt provisions 
to limit the manufacture of heat pump water heaters with HFC 
refrigerants in that final rule. EPA restricts the use of HFCs and 
blends containing HFCs with a GWP of 150 or greater beginning January 
1, 2025 for all foam subsectors, including rigid polyurethane for use 
in water heaters. As discussed in chapter 3 of the final rule TSD, DOE 
found that water heater manufacturers have already begun transitioning 
to alternative blowing agents for insulation foam. Additionally, DOE 
notes that the January 1, 2025 compliance date falls outside the 
cumulative regulatory burden timeframe. Regarding the comments about 
EPA's new ENERGY STAR levels, DOE notes that participating in ENERGY 
STAR is voluntary and not considered in DOE's analysis of cumulative 
regulatory burden.
    Regarding BWC's request that DOE not discount the costs for 
stakeholders to review rulemakings, although appreciative that 
monitoring and responding to rulemakings does impose costs for 
stakeholders, DOE believes that this is outside the scope of analysis 
for individual product rulemakings. Because EPCA requires DOE to 
establish and maintain the energy conservation program for consumer 
products and to periodically propose new and amended standards (or 
propose that standards for products do not need to be amended) and test 
procedures, DOE considers this rulemaking activity to be part of the 
analytical baseline (i.e., in the no-new-standards case and the 
standards case). That is, these activities (e.g., reviewing proposed 
rules or proposed determinations) would exist regardless of the 
regulatory option that DOE adopts through a rulemaking and would be 
independent from the conversion costs required to adapt product designs 
and manufacturing facilitates to meet an amended standard.
c. Manufacturing Capacity
    A.O. Smith noted that while it supports the intent of DOE's 
proposal to move the minimum energy conservation standards for a subset 
of consumer water heaters, A.O. Smith remains concerned with the 
feasibility of implementing these dramatic shifts in the time frame 
proposed. A.O. Smith commented that the July 2023 NOPR would drive an 
unprecedented transformation for the water heater industry, impacting 
manufacturers, its supply chain, distributors, plumbers, and 
installers. A.O. Smith noted that it invested significant capital in 
its heat pump manufacturing facility following the April 2010 Final 
Rule in anticipation of a ramp up in demand, which did not materialize. 
A.O. Smith noted it plans to make the necessary investments to 
transition to heat pump water heaters, but expressed concern that 
uncertainty in the market may place these investments at risk. A.O. 
Smith further expressed concern about the availability of the necessary 
components at the scale the July 2023 NOPR would require, as well as 
the current shortage of workers with the necessary skills and 
experience to manufacture heat pump water heaters. (A.O. Smith, No. 
1182 at pp. 17-19) Gas Association Commenters questioned the realism of 
ramping up heat pump water heater capacity, stating that DOE did not 
provide sufficient analysis showing how manufacturers could produce an 
additional 3 to 4 million electric heat pump water heaters per year. 
(Gas Association Commenters, No. 1181 at p. 33)
    Rheem commented it is committed to transitioning the majority of 
its electric storage water heaters to heat pump water heaters within 
the 5-year compliance period, which Rheem views as sufficiently long to 
complete the conversion. Rheem recommended that DOE and other Federal 
agencies promote awareness of this rulemaking and the future of water 
heating in the United States, particularly among plumbers, contractors, 
and consumers. (Rheem, No. 1177 at p. 10)
    DOE recognizes that the standards proposed in the July 2023 NOPR 
and adopted in this final rule would require investments to update 
production facilities and redesign products. DOE accounts for product 
and capital conversion costs in the MIA. See section IV.J.2.c of this 
document. Regarding industry's ability to ramp up production within the 
5-year compliance period, DOE believes that having a major manufacturer 
sign on to the Joint Stakeholder 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 amended standards. Regarding the 
uncertainty in the market related to heat pump water heaters, DOE 
recognizes that amended standards could lead to shifts in the market 
towards smaller electric storage water heater sizes which can meet the 
adopted standard levels without the use of heat pump technology. DOE 
accounts for the potential market shift in its shipments analysis, a 
key input to the GRIM. For this final rule, DOE assumes a portion of 
consumers would select 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 under amended standards, see IV.G.1 of this document 
for additional details. DOE notes that measures such as requiring high-
temperature testing will be required for certain electric storage water 
heaters. As discussed in section V.D.1 of this document, the use of 
high-temperature testing will be required for small electric resistance 
water heaters that are able to continuously store water at a higher 
temperature than the delivered water temperature setpoint since DOE 
expects that consumers will use the high-temperature mode as part of 
the regular operation of their water heater. By implementing the high-
temperature test method for certain smaller electric storage water 
heaters designed to compete with larger electric storage water heaters 
by operating at a higher temperature, DOE will 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. In other words, the high-
temperature test method would create an equivalent basis of comparison 
for products which can offer the same effective storage capacity. See 
section V.D.1 of this document for information on high-temperature 
testing.

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 in 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

[[Page 37885]]

uses emissions 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 final 
rule 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.\161\
---------------------------------------------------------------------------

    \161\ Available at www.epa.gov/sites/production/files/2021-04/documents/emission-factors_apr2021.pdf (last accessed Dec. 1, 2023).
---------------------------------------------------------------------------

    The on-site operation of consumer water heaters involves 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.\162\
---------------------------------------------------------------------------

    \162\ 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/air-emissions-factors-and-quantification/ap-42-compilation-air-emissions-factors#Proposed/ 
(last accessed July 12, 2021).
---------------------------------------------------------------------------

    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 final rule TSD.
    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.
    BWC recommended including emissions as a result of increased 
manufacturing of parts at a higher standard level, such as compressors, 
evaporators, and other parts for heat pump water heaters. Additionally, 
BWC mentioned that the leaking of refrigerant in heat pump water 
heaters may result in additional unaccounted-for emissions and BWC is 
discouraged that DOE has already declined to take the emission from 
refrigerant leakages into account in the Energy Conservation Standards 
for Consumer Pool Heater Final Rule. BWC commented that ASHRAE 
standards are in development to measure refrigerant leakage 
expectations for heat pump products that could be leveraged in future 
DOE analysis. (BWC No. 1164 at p. 5)
    DOE's emissions analysis is guided by section 16.h of Appendix 
A,\163\ which states that DOE calculates emissions reductions of carbon 
dioxide, sulfur dioxide, nitrogen oxides, methane, nitrous oxides, and 
mercury likely to be avoided based on an analysis that includes 
specific components. These components only include direct emissions 
from use of covered products and emissions in the full-fuel-cycle. DOE 
has never considered air pollutant emissions associated with 
manufacturing or transport of products or emissions of refrigerants. 
Even if DOE considered the emissions from refrigerants, DOE estimates 
that refrigerant leakages in heat pump water heaters will be rare and 
can be prevented with regular inspection and repair, which DOE accounts 
for as repair and maintenance costs in its LCC analysis. If refrigerant 
leaks do occur, the associated emissions increase would still be 
negligible compared to the emissions savings of this rule. Accounting 
for refrigerant leakage would not change the economic justification of 
the rule.
---------------------------------------------------------------------------

    \163\ Appendix A to Subpart C of Part 430--Procedures, 
Interpretations, and Policies for Consideration of New or Revised 
Energy Conservation Standards and Test Procedures for Consumer 
Products and Certain Commercial/Industrial Equipment. https://www.ecfr.gov/current/title-10/chapter-II/subchapter-D/part-430/subpart-C/appendix-Appendix%20A%20to%20Subpart%20C%20of%20Part%20430.
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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 reflects, to the extent 
possible, laws and regulations adopted through mid-November 2022, 
including the emissions control programs discussed in the following 
paragraphs the emissions control programs discussed in the following 
paragraphs, and the Inflation Reduction Act.\164\
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    \164\ 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 Dec. 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 (Aug. 8, 2011). CSAPR requires these 
States to reduce certain emissions, including annual SO2 
emissions, and went into effect as of January 1, 2015.\165\ The AEO 
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, for states subject to SO2 
emissions limits under CSAPR, 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.
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    \165\ 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-Sept.) 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), and EPA issued the CSAPR Update for the 2008 
ozone NAAQS. 81 FR 74504 (Oct. 26, 2016).
---------------------------------------------------------------------------

    However, beginning in 2016, SO2 emissions began to fall 
as a result of the Mercury and Air Toxics Standards (``MATS'') for 
power plants.\166\ 77 FR 9304 (Feb. 16, 2012). The final rule 
establishes power plant emission standards for mercury, acid gases, and 
non-mercury metallic toxic pollutants. 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 will generally reduce 
SO2 emissions. DOE estimated SO2 emissions 
reduction using emissions factors based on AEO2023.
---------------------------------------------------------------------------

    \166\ 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.

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[[Page 37886]]

    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. 
Depending on the configuration of the power sector in the different 
regions and the need for allowances, however, NOX emissions 
might not remain at the limit in the case of lower electricity demand. 
That would mean that 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. 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 final 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 final rule.
    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 (``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 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 IWG on the Social Cost of Greenhouse Gases 
or by another means, did not affect the rule ultimately adopted 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 (``February 2021 SC-GHG TSD''). The SC-GHG 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, the SC-GHG 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-GHG therefore, reflects the societal value of reducing emissions 
of the gas in question by one metric ton. The SC-GHG 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 agreed that the interim SC-GHG estimates represent 
the most appropriate estimate of the SC-GHG until revised estimates are 
developed reflecting the latest, peer-reviewed science. See 87 FR 
78382, 78406-78408 for discussion of the development and details of the 
IWG SC-GHG estimates.
    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.\167\ 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, 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 SC-GHG 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.
---------------------------------------------------------------------------

    \167\ Interagency Working Group on Social Cost of Greenhouse 
Gases. 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/.
---------------------------------------------------------------------------

    DOE's derivations of the SC-CO2, SC-N2O, and 
SC-CH4 values used for this

[[Page 37887]]

final rule 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.B.6 of this document.
    The Attorney General of TN asserted that the standards improperly 
rely on faulty social-cost-of-carbon estimate. (Attorney General of TN, 
No. 1149 at p. 2) In response, DOE noted that the Interagency Working 
Group's (IWG) Social Costs of Greenhouse Gas (SC-GHG) estimates were 
developed over many years, using transparent process, peer-reviewed 
methodologies, the best science available at the time of that process, 
and with input from the public. The IWG's 2016 TSD \168\ and the 2017 
National Academies report provide detailed discussions of the ways in 
which the modeling underlying the development of the SC-GHG estimates 
addressed quantified sources of uncertainty.\169\ In the February 2021 
SC-GHG TSD, the IWG stated that the models used to produce the interim 
estimates do not include all of the important physical, ecological, and 
economic impacts of climate change recognized in the climate change 
literature. In the judgment of the IWG, these and other limitations 
suggest that the range of four interim SC-GHG estimates presented in 
the TSD likely underestimate societal damages from GHG emissions.
---------------------------------------------------------------------------

    \168\ Interagency Working Group on Social Cost of Greenhouse 
Gases, United States Government. Technical Update on the Social Cost 
of Carbon for Regulatory Impact Analysis Under Executive Order 
12866. August 2016. (Last accessed January 18, 2022.) www.epa.gov/sites/default/files/2016-12/documents/sc_co2_tsd_august_2016.pdf.
    \169\ An overview is presented in section 4.1 of the February 
2021 SC-GHG TSD.
---------------------------------------------------------------------------

    DOE is aware that in December 2023, EPA issued a new set of SC-GHG 
estimates in connection with a final rulemaking under the Clean Air 
Act. \170\ As DOE had used the IWG interim values in proposing this 
rule and is currently reviewing the updated 2023 SC-GHG values, for 
this final rule, DOE used these updated 2023 SC-GHG values to conduct a 
sensitivity analysis of the value of GHG emissions reductions. DOE 
notes that because EPA's estimates are considerably higher than the 
IWG's interim SC-GHG values applied for this final rule, an analysis 
that uses the EPA's estimates results in significantly greater climate-
related benefits. However, such results would not affect DOE's decision 
in this final rule. As stated elsewhere in this document, DOE would 
reach the same conclusion regarding the economic justification of the 
standards presented in this final rule without considering the IWG's 
interim SC-GHG values, which DOE agrees are conservative estimates. For 
the same reason, if DOE were to use EPA's higher SC-GHG estimates, they 
would not change DOE's conclusion that the standards are economically 
justified.
---------------------------------------------------------------------------

    \170\ See www.epa.gov/environmental-economics/scghg.
---------------------------------------------------------------------------

a. Social Cost of Carbon
    The SC-CO2 values used for this final rule were based on 
the values developed for the February 2021 SC-GHG TSD, which are shown 
in Table IV.30 in 5-year increments from 2020 to 2050. The set of 
annual values that DOE used, which was adapted from estimates published 
by EPA,\171\ is presented in appendix 14A of the final rule TSD. These 
estimates are based on methods, assumptions, and parameters identical 
to the estimates published by the IWG (which were based on EPA 
modeling) and include values for 2051 to 2070. DOE expects additional 
climate benefits to accrue for products still operating 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.
---------------------------------------------------------------------------

    \171\ 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 Dec. 1, 2023).
[GRAPHIC] [TIFF OMITTED] TR06MY24.045

    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 
final rule were based on the values developed for the February 2021 SC-
GHG 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 final rule 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.

[[Page 37888]]

[GRAPHIC] [TIFF OMITTED] TR06MY24.046

    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 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 cases using the specific discount 
rate that had been used to obtain the SC-CH4 and SC-
N2O estimates in each case.
c. Sensitivity Analysis Using Updated SC-GHG Estimates
    In December 2023, EPA issued an updated set of SC-GHG estimates 
(2023 SC-GHG) in connection with a final rulemaking under the Clean Air 
Act.\172\ These estimates incorporate recent research and address 
recommendations of the National Academies (2017) and comments from a 
2023 external peer review of the accompanying technical report. For 
this rulemaking, DOE used these updated 2023 SC-GHG values to conduct a 
sensitivity analysis of the value of GHG emissions reductions 
associated with alternative standards for consumer water heaters. This 
sensitivity analysis provides an expanded range of potential climate 
benefits associated with amended standards. The final year of EPA's new 
2023 SC-GHG estimates is 2080; therefore, DOE did not monetize the 
climate benefits of GHG emissions reductions occurring after 2080.
---------------------------------------------------------------------------

    \172\ See www.epa.gov/environmental-economics/scghg.
---------------------------------------------------------------------------

    The overall climate benefits are greater when using the higher, 
updated 2023 SC-GHG estimates, compared to the climate benefits using 
the older IWG SC-GHG estimates. The results of the sensitivity analysis 
are presented in appendix 14C of the final rule TSD.
2. Monetization of Other Emissions Impacts
    For the final rule, DOE estimated the monetized value of 
NOX and SO2 emissions reductions from electricity 
generation using benefit-per-ton estimates for that sector from the 
EPA's Benefits Mapping and Analysis Program.\173\ 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 and 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 
regional benefit-per-ton estimates with regional information on 
electricity consumption and emissions from AEO2023 to define weighted-
average national values for NOX and SO2 (see 
appendix 14B of the final rule TSD).
---------------------------------------------------------------------------

    \173\ U.S. Environmental Protection Agency. Estimating the 
Benefit per Ton of Reducing Directly-Emitted PM2.5, 
PM2.5 Precursors and Ozone Precursors from 21 Sectors. 
Available at www.epa.gov/benmap/estimating-benefit-ton-reducing-directly-emitted-pm25-pm25-precursors-and-ozone-precursors (last 
accessed Dec. 1, 2023).
---------------------------------------------------------------------------

    DOE also estimated the monetized value of NOX and 
SO2 emissions reductions from site use of natural gas 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.\174\ The EPA document 
provides high and low estimates for 2025 and 2030 at 3- and 7-percent 
discount rates.\175\ DOE used the same linear interpolation and 
extrapolation as it did with the values for electricity generation.
---------------------------------------------------------------------------

    \174\ ``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.
    \175\ ``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. 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 chapter 15 of the final 
rule 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. The utility

[[Page 37889]]

analysis also estimates the impact on gas utilities in terms of 
projected changes in natural gas deliveries to consumers for each TSL.

N. Employment Impact Analysis

    DOE considers employment impacts in the domestic economy as one 
factor in selecting a 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. 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.\176\ 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.
---------------------------------------------------------------------------

    \176\ See U.S. Department of Commerce--Bureau of Economic 
Analysis. Regional Input-Output Modeling System (RIMS II) User's 
Guide. Available at: www.bea.gov/resources/methodologies/RIMSII-user-guide (last accessed Jan. 18, 2024).
---------------------------------------------------------------------------

    DOE estimated indirect national employment impacts for the standard 
levels considered in this final rule using an input/output model of the 
U.S. economy called Impact of Sector Energy Technologies version 4 
(``ImSET'').\177\ 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.
---------------------------------------------------------------------------

    \177\ 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's Guide. 2015. Pacific Northwest National 
Laboratory: Richland, WA. PNNL-24563.
---------------------------------------------------------------------------

    DOE notes that ImSET is not a general equilibrium forecasting 
model, and that there are 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 (2030-2034), where these 
uncertainties are reduced. For more details on the employment impact 
analysis, see chapter 16 of the final rule 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 adopting in this final rule. Additional details 
regarding DOE's analyses are contained in the final rule TSD supporting 
this document.

A. Trial Standard Levels

    In general, DOE typically evaluates potential new or 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 price elasticity of 
consumer purchasing decisions that may change when different standard 
levels are set. 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 final rule, 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 
final rule TSD.
    Table V.1 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 the 7-percent discount rate for 
all product classes. For gas-fired gas storage water heater, the NPV at 
the 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 classes compared to the max-tech. TSL 4 
represents the highest efficiency level for each product class with the 
maximum NPV at the 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). 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 37890]]

[GRAPHIC] [TIFF OMITTED] TR06MY24.047

    DOE constructed the TSLs for this final rule 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.\178\
---------------------------------------------------------------------------

    \178\ Efficiency levels that were analyzed for this final rule 
are discussed in section IV.C of this document. Results by 
efficiency level are presented in TSD chapters 8, 10, and 12.
---------------------------------------------------------------------------

B. Economic Justification and Energy Savings

1. Economic Impacts on Individual Consumers
    DOE analyzed the economic impacts on consumer water heater 
consumers by looking at the effects that potential new and 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 final rule 
TSD provides detailed information on the LCC and PBP analyses.
    Table V.2 through Table V.11 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, the impacts are measured relative to the 
efficiency distribution in the 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.
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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.12 through Table V.16 compare the average LCC 
savings and PBP at each efficiency level for the consumer subgroups 
with

[[Page 37893]]

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 final rule TSD presents 
the complete LCC and PBP results for the subgroups.
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c. Rebuttable Presumption Payback
    As discussed in section III.F.2 of this document, 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 procedures for consumer water heaters. 
In contrast, the PBPs presented in section V.B.1.a of this document 
were calculated using distributions that reflect the range of energy 
use in the field.
    Table V.17 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 this rule 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.
[GRAPHIC] [TIFF OMITTED] TR06MY24.063

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 
next section describes the expected impacts on manufacturers at each 
considered TSL. Chapter 12 of the final rule 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 per-unit 
dollar profit would also increase. DOE assumed a ``gross margin 
percentage'' of 31 percent for gas-fired storage water heaters, 30 
percent for oil-fired storage

[[Page 37896]]

water heaters, and 28 percent for all electric storage water heaters. 
These gross margin percentages (and corresponding manufacturer markups) 
are the same as the ones 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 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.
[GRAPHIC] [TIFF OMITTED] TR06MY24.064


[[Page 37897]]


[GRAPHIC] [TIFF OMITTED] TR06MY24.065

    At TSL 1, DOE estimates that impacts on INPV would range from -$8.4 
million to $5.5 million, or a change in INPV of -0.6 percent to 0.4 
percent. At TSL 1, industry free cash flow is $121.0 million, which is 
a decrease of $3.0 million, or a drop of 2.4 percent, compared to the 
no-new-standards case value of $124.0 million in 2029, the year leading 
up to the standards year. Industry conversion costs total $7.5 million. 
At TSL 1, approximately 73 percent of consumer water heater shipments 
are expected to meet the required efficiency levels by the analyzed 
2030 compliance date.
    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 efficiency level 
(i.e., EL 0), electric storage water heaters with an effective storage 
volume of at least 20 gallons and less than or equal to 55 gallons 
(excluding small electric storage water heaters) at baseline, and 
electric storage water heaters with effective storage volumes above 55 
gallons at EL 1. At TSL 1, DOE estimates that manufacturers would incur 
approximately $3.5 million in product conversion costs, as some gas-
fired storage water heaters and electric storage water heaters would 
need to be redesigned to comply with the standard. DOE also estimates 
that manufacturers would incur approximately $4.0 million in capital 
conversion costs at TSL 1 to accommodate the need for increased 
capacity for gas-fired and electric storage water heaters.
    At TSL 1, the shipment-weighted average MPC for consumer water 
heaters covered by this rulemaking increases by 1.6 percent relative to 
the no-new-standards case shipment-weighted average MPC for all water 
heaters in 2030. Given the relatively small increase in production 
costs, DOE does not project a notable drop in shipments in the year the 
standard takes effect. In the preservation of gross margin scenario, 
manufacturers are able to fully pass on this slight cost increase to 
consumers. In the preservation of gross margin percentage scenario, the 
slight increase in cashflow from the higher MSP outweighs the $7.5 
million in conversion costs, causing a slightly positive change in INPV 
at TSL 1 under this scenario.
    Under the preservation of operating profit scenario, manufacturers 
earn the same per-unit operating profit as would be earned in the no-
new-standards case in 2031 (a year after the analyzed compliance year), 
but manufacturers do not earn additional profit from their investments. 
In this scenario, the manufacturer markup decreases in 2031. This 
reduction in the manufacturer markup and the $7.5 million in conversion 
costs incurred by manufacturers cause a slightly negative change in 
INPV at TSL 1 under the preservation of operating profit scenario.
    At TSL 2, DOE estimates that impacts on INPV would range from -
$275.3 million to $28.2 million, or a change in INPV of -18.6 percent 
to 1.9 percent. At TSL 2, industry free cash flow is $17.3 million, 
which is a decrease of $106.7 million, or a drop of 86.0 percent 
compared to the no-new-standards case value of $124.0 million in 2029, 
the year leading up to the standards year. Industry conversion costs 
total $239.8 million. At TSL 2, approximately 24 percent of consumer 
water heater shipments are expected to meet the required efficiency 
levels by the analyzed 2030 compliance date.
    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 of at least 20 gallons 
and less than 55 gallons (excluding small electric storage water 
heaters) at EL 1, and electric storage water heaters with an effective 
storage

[[Page 37898]]

volume of above 55 gallons at EL 1. At TSL 2, DOE estimates that 
manufacturers would incur approximately $11.1 million in product 
conversion costs, as some gas-fired storage water heaters and electric 
storage water heaters would 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. In 2023, heat 
pump electric storage water heaters comprise approximately 3 percent of 
the electric storage water heater market. At TSL 2, heat pump water 
heaters are expected to comprise approximately 61 percent of the 
electric storage water heater market in 2030 since all electric storage 
water heaters (except for small electric storage) would need to meet 
heat pump levels, driving large investments to expand production 
capacity of heat exchangers and to optimize production costs. Driven by 
the need for increased heat exchanger production capacity, DOE 
estimates that manufacturers would incur approximately $207.6 million 
in capital conversion costs for electric storage water heaters (and 
$228.7 million in capital conversion costs for all product classes) at 
TSL 2.
    At TSL 2, the shipment-weighted average MPC for consumer water 
heaters covered by this rulemaking increases by 36.6 percent relative 
to the no-new-standards case shipment-weighted average MPC for all 
water heaters in 2030. Despite an increase in production costs, DOE 
does not project a notable drop in shipments in the year the standard 
takes effect. In the preservation of gross margin scenario, 
manufacturers are able to fully pass on this cost increase to 
consumers. In the preservation of gross margin percentage scenario, the 
increase in cashflow from the higher MSP outweighs the $239.8 in 
conversion costs, causing a slightly positive change in INPV at TSL 2 
under this scenario.
    Under the preservation of operating profit scenario, manufacturers 
earn the same per-unit operating profit as would be earned in the no-
new-standards case in 2031 (a year after the analyzed compliance year), 
but manufacturers do not earn additional profit from their investments. 
In this scenario, the manufacturer markup decreases in 2031. This 
reduction in the manufacturer markup and the $239.8 million in 
conversion costs incurred by manufacturers cause a negative change in 
INPV at TSL 2 under the preservation of operating profit scenario.
    At TSL 3, DOE estimates that impacts on INPV would range from -
$391.5 million to -$39.8 million, or a change in INPV of -26.5 percent 
to -2.7 percent. At TSL 3, industry free cash flow is -$24.1 million, 
which is a decrease of $148.1 million, or a drop of 119.4 percent, 
compared to the no-new-standards case value of $124.0 million in 2029, 
the year leading up to the standards year. Industry conversion costs 
total $332.4 million. At TSL 3, approximately 17 percent of consumer 
water heater shipments are expected to meet the required efficiency 
levels by the analyzed 2030 compliance date.
    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 of at least 20 gallons and 
less than 55 gallons (excluding small electric storage water heaters) 
at EL 1, and electric storage water heaters with an effective storage 
volume of above 55 gallons at EL 1. At TSL 3, DOE estimates that 
manufacturers would incur approximately $13.3 million in product 
conversion costs, as some gas-fired storage water heaters and electric 
storage water heaters with an effective storage volume of between 20 
and 55 gallons would need to be redesigned to comply with the standard. 
In 2023, heat pump electric storage water heaters comprise 
approximately 3 percent of the electric storage water heater market. In 
2030 (the analyzed compliance year), heat pump electric storage water 
heaters would comprise 100 percent of the electric storage water heater 
market, driving large investments in product redesign and expanding 
heat exchanger manufacturing capacity. This would necessitate small 
electric storage water heater manufacturers developing split-system 
heat pump designs. Driven by the need for increased heat exchanger 
production capacity, DOE estimates that the industry would incur 
approximately $297.9 million in capital conversion costs for electric 
storage water heaters (and $319.0 million in capital conversion costs 
for all product classes) at TSL 3.
    At TSL 3, the large conversion costs result in a free cash flow 
dropping below zero in the years before the standards year. The 
negative free cash flow calculation indicates manufacturers may need to 
access cash reserves or outside capital to finance conversion efforts.
    At TSL 3, the shipment-weighted average MPC for consumer water 
heaters covered by this rulemaking increases by 54.7 percent relative 
to the no-new-standards case shipment-weighted average MPC for all 
water heaters in 2030. Given the projected increase in production 
costs, DOE expects an estimated 15.4 percent drop in shipments in the 
year the standard takes effect relative to the no-new-standards case. 
The increase in cashflow from the higher MSP is outweighed by the 
$332.4 million in conversion costs and the drop in annual shipments, 
causing a slightly negative change in INPV at TSL 3 under this 
scenario.
    Under the preservation of operating profit scenario, manufacturers 
earn the same per-unit operating profit as would be earned in the no-
new-standards case in 2031 (a year after the analyzed compliance year), 
but manufacturers do not earn additional profit from their investments. 
In this scenario, the manufacturer markup decreases in 2031. This 
reduction in the manufacturer markup, $332.4 million in conversion 
costs incurred by manufacturers, and the drop in annual shipments cause 
a large negative change in INPV at TSL 3 under the preservation of 
operating profit scenario.
    At TSL 4, DOE estimates that impacts on INPV would range from -
$420.1 million to -$31.2 million, or a change in INPV of -28.4 percent 
to -2.1 percent. At TSL 4, industry free cash flow is -$29.3 million, 
which is a decrease of -$153.3 million, or a drop of 123.6 percent, 
compared to the no-new-standards case value of $124.0 million in 2029, 
the year leading up to the standards year. Industry conversion costs 
total $344.0 million. At TSL 4, approximately 17 percent of consumer 
water heater shipments are expected to meet the required efficiency 
levels by the analyzed 2030 compliance date.
    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 of at least 20 gallons and 
less than 55 gallons (excluding small electric storage water heaters) 
at EL 2, and electric storage water heaters with an effective storage 
volume of above 55 gallons at EL 2. At TSL 4, DOE estimates that 
manufacturers would incur approximately $13.6 million in product 
conversion costs, as some gas-fired storage water heaters, electric 
storage water heaters with an effective storage volume of between 20 
and 55 gallons, and electric storage water heaters with an effective 
storage volume of above 55 gallons would need to be redesigned to 
comply with the standard. In 2023, heat

[[Page 37899]]

pump electric storage water heaters comprise approximately 3 percent of 
the electric storage water heater market. In 2030 (the analyzed 
compliance year), heat pump electric storage water heaters would 
comprise 100 percent of the electric storage water heater market, 
driving large investments in product redesign and expanding heat 
exchanger manufacturing capacity. This would necessitate small electric 
storage water heater manufacturers developing split-system heat pump 
designs. Driven by the need for increased heat exchanger production 
capacity, DOE estimates that the industry would incur approximately 
$309.3 million in capital conversion costs for electric storage water 
heaters (and $330.4 million in capital conversion costs for all product 
classes) at TSL 4.
    At TSL 4, the large conversion costs result in a free cash flow 
dropping below zero in the years before the standards year. The 
negative free cash flow calculation indicates manufacturers may need to 
access cash reserves or outside capital to finance conversion efforts.
    At TSL 4, the shipment-weighted average MPC for consumer water 
heaters covered by this rulemaking increases by 58.7 percent relative 
to the no-new-standards case shipment-weighted average MPC for all 
water heaters in 2030. Given the projected increase in production 
costs, DOE expects an estimated 15.2 percent drop in shipments in the 
year the standard takes effect relative to the no-new-standards case. 
The increase in cashflow from the higher MSP is outweighed by the 
$344.0 million in conversion costs and the drop in annual shipments, 
causing a slightly negative change in INPV at TSL 4 under this 
scenario.
    Under the preservation of operating profit scenario, manufacturers 
earn the same per-unit operating profit as would be earned in the no-
new-standards case in 2031 (a year after the analyzed compliance year), 
but manufacturers do not earn additional profit from their investments. 
In this scenario, the manufacturer markup decreases in 2031. This 
reduction in the manufacturer markup, $344.0 million in conversion 
costs incurred by manufacturers, and the drop in annual shipments cause 
a large negative change in INPV at TSL 4 under the preservation of 
operating profit scenario.
    At TSL 5, DOE estimates that impacts on INPV would range from -
$478.1 million to -$31.3 million, or a change in INPV of -32.3 percent 
to -2.1 percent. At TSL 5, industry free cash flow is -$48.8 million, 
which is a decrease of $172.8 million, or a drop of 139.4 percent 
compared to the no-new-standards case value of $124.0 million in 2029, 
the year leading up to the standards year. Industry conversion costs 
total $387.6 million. At TSL 5, approximately 14 percent of consumer 
water heater shipments are expected to meet the required efficiency 
levels by the analyzed 2030 compliance date.
    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 of less than 55 gallons 
(excluding small electric storage water heaters) at EL 3, and electric 
storage water heaters with effective an volume of above 55 gallons at 
EL 3. At TSL 5, DOE estimates that manufacturers would incur 
approximately $14.6 million in product conversion costs, as some gas-
fired storage water heaters, electric storage water heaters with an 
effective storage volume of between 20 and 55 gallons, and electric 
storage water heaters with an effective storage volume above 55 gallons 
would need to be redesigned to comply with the standard. In 2023, heat 
pump electric storage water heaters comprise approximately 3 percent of 
the electric storage water heater market. At TSL 5, 100 percent of 
electric storage water heaters would need to meet heat pump levels, 
driving large investments in product redesign and expanding heat 
exchanger manufacturing capacity. This would necessitate small electric 
storage water heater manufacturers developing split-system heat pump 
designs. Additionally, requiring larger condensers for gas-fired 
storage water heaters would require significant investments in 
capacity. Driven by the need for increased heat exchanger production 
capacity for electric storage water heaters and increased production 
capacity for larger condensers for gas-fired storage water heaters, DOE 
estimates that the industry would incur approximately $373.1 million in 
capital conversion costs at TSL 5.
    At TSL 5, the large conversion costs result in a free cash flow 
dropping below zero in the years before the standards year. The 
negative free cash flow calculation indicates manufacturers may need to 
access cash reserves or outside capital to finance conversion efforts.
    At TSL 5, the shipment-weighted average MPC for consumer water 
heaters covered by this rulemaking increases by 66.6 percent relative 
to the no-new-standards case shipment-weighted average MPC for all 
water heaters in 2030. Given the projected increase in production 
costs, DOE expects an estimated 16.0 percent drop in shipments in the 
year the standard takes effect relative to the no-new-standards case. 
The increase in cashflow from the higher MSP is outweighed by the 
$387.6 million in conversion costs and the drop in annual shipments, 
causing a slightly negative change in INPV at TSL 5 under this 
scenario.
    Under the preservation of operating profit scenario, manufacturers 
earn the same per-unit operating profit as would be earned in the no-
new-standards case in 2031 (a year after the analyzed compliance year), 
but manufacturers do not earn additional profit from their investments. 
In this scenario, the manufacturer markup decreases in 2031. This 
reduction in the manufacturer markup, the $387.6 million in conversion 
costs incurred by manufacturers, and the drop in annual shipments cause 
a large negative change in INPV at TSL 5 under the preservation of 
operating profit scenario.
    At TSL 6, DOE estimates that impacts on INPV would range from -
$709.5 million to -$5.2 million, or a change in INPV of -48.0 percent 
to -0.4 percent. At TSL 6, industry free cash flow is -$155.0 million, 
which is a decrease of $279.0 million, or a drop of 225.0 percent, 
compared to the no-new-standards case value of $124.0 million in 2029, 
the year leading up to the standards year. Industry conversion costs 
total $626.2 million. At TSL 6, approximately 2 percent of consumer 
water heater shipments are expected to meet the required efficiency 
levels by the analyzed 2030 compliance date.
    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 of less than 55 gallons 
(excluding small electric storage water heaters) at EL 3, and electric 
storage water heaters with an effective storage volume of above 55 
gallons at EL 3. At TSL 6, DOE estimates that manufacturers would incur 
approximately $25.1 million in product conversion costs, as some gas-
fired storage water heaters and electric storage water heaters with an 
effective storage volume of between 20 and 55 gallons would need to be 
redesigned to comply with the standard. In 2023, heat pump electric 
storage water heaters comprise approximately 3 percent of the electric 
storage water heater market. At TSL 6, 100 percent of electric storage 
water heaters would need to meet heat pump levels, driving large 
investments in product redesign and expanding heat

[[Page 37900]]

exchanger manufacturing capacity. This would necessitate small electric 
storage water heater manufacturers developing split-system heat pump 
designs. Additionally, requiring larger condensers, electronic 
ignition, power venting, and larger heat exchangers for gas-fired 
storage water heaters would require significant investments in 
capacity. Driven by the need for increased heat exchanger production 
capacity for electric storage water heaters and increased production 
capacity for electronic ignition, power venting, larger heat 
exchangers, and larger condensers for gas-fired storage water heaters, 
DOE estimates that the industry would incur approximately $601.1 
million in capital conversion costs at TSL 6.
    At TSL 6, the large conversion costs result in a free cash flow 
dropping below zero in the years before the standards year. The 
negative free cash flow calculation indicates manufacturers may need to 
access cash reserves or outside capital to finance conversion efforts.
    At TSL 6, the shipment-weighted average MPC for consumer water 
heaters covered by this rulemaking increases by 101.6 percent relative 
to the no-new-standards case shipment-weighted average MPC for all 
water heaters in 2030. Given the projected increase in production 
costs, DOE expects an estimated 19.4 percent drop in shipments in the 
year the standard takes effect relative to the no-new-standards case. 
In this scenario, the increase in cashflow from the higher MSP is 
outweighed by the $626.2 million in conversion costs and the drop in 
annual shipments, causing a slightly negative change in INPV at TSL 6 
under this scenario.
    Under the preservation of operating profit scenario, manufacturers 
earn the same per-unit operating profit as would be earned in the no-
new-standards case in 2031 (a year after the analyzed compliance year), 
but manufacturers do not earn additional profit from their investments. 
In this scenario, the manufacturer markup decreases in 2031. This 
reduction in the manufacturer markup, the $626.2 million in conversion 
costs, and the drop in annual shipments incurred by manufacturers cause 
a significant negative change in INPV at TSL 6 under the preservation 
of operating profit scenario.
b. Direct Impacts on Employment
    To quantitatively assess the potential impacts of amended energy 
conservation standards on direct employment in the consumer water 
heater 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 hourly wages from the 
engineering analysis and the ASM inputs: \179\ Production Workers' 
Annual Hours, Production Workers for Pay Period, and Number of 
Employees. DOE also relied on the BLS employee compensation data \180\ 
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.
---------------------------------------------------------------------------

    \179\ U.S. Census Bureau's Annual Survey of Manufactures: 2018-
2021 (Available at: www.census.gov/programs-surveys/asm/data/tables.html) (last accessed January 18, 2024).
    \180\ U.S. Bureau of Labor Statistics. Employer Costs for 
Employee Compensation. (September 2023) (Dec. 15, 2023) Available at 
www.bls.gov/news.release/archives/ecec_12152023.pdf (last accessed 
Jan. 1, 2024).
---------------------------------------------------------------------------

    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 80 percent of consumer water heaters 
analyzed in this final rule 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 final rule.
    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 4,110 domestic 
production and non-production employees for consumer water heaters in 
2030. Table V.20 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.20.

[[Page 37901]]

[GRAPHIC] [TIFF OMITTED] TR06MY24.066

    The direct employment impacts shown in Table V.20 represent the 
potential domestic employment changes that could result following the 
compliance date for the consumer water heater product classes analyzed 
in this final rule. Manufacturing 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 
reflects the risk of manufacturers re-evaluating production siting 
decisions in response to amended energy conservation standards. This 
conservative lower bound of domestic direct employment varies by TSL 
and product class. For this final rule, DOE reassessed and adjusted its 
conservative lower bound of potential domestic direct employment 
impacts to account for the potential that gas-fired storage water 
heater OEMs may re-evaluate domestic manufacturing locations at certain 
analyzed TSLs.
    For electric storage water heaters (which account for approximately 
51 percent of shipments in 2030), the lower end of the domestic 
employment range represents the potential decrease in production 
workers if manufacturing of heat pump electric storage water heaters 
moves to lower labor-cost countries in response to the large 
investments necessary to expand heat exchanger production capacity. To 
establish the estimated change in domestic direct employment for 
electric storage water heaters, the direct employment analysis assumed 
a reduction in domestic employment commensurate with the percentage of 
electric storage water heater shipments that transition to heat pump 
designs. For gas-fired storage water heaters (which account for 
approximately 49 percent of shipments in 2030), the lower bound 
represents a shift of all domestic production workers to foreign 
production locations at max-tech (TSL 6). At max-tech, it is possible 
that manufacturers would revisit their siting decisions based on the 
need for increased production capacity for larger condensers. DOE 
applied this conservative assumption to establish a lower bound that 
avoids underestimating the potential direct employment impacts.
    Additional detail on the analysis of direct employment can be found 
in chapter 12 of the final rule TSD. Additionally, the employment 
impacts discussed in this section are independent of the employment 
impacts from the broader U.S. economy, which are documented in chapter 
16 of the final rule 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 of between 20 and 55 gallons. The 
vast majority of sales today in this product class are electric 
resistance water heaters. DOE estimates that approximately 3 percent of 
current electric storage consumer water heater sales are heat pump 
units. At the final rule level, all electric storage water heaters, 
excluding small electric storage water heaters, would need to 
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. 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 TSL 2, conversion 
costs total $239.8 million, presuming all OEMs of electric storage 
water heaters, excluding small 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 U.S. 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 North American Industry 
Classification System (``NAICS'') code 335220, ``Major Household 
Appliance Manufacturing,'' a consumer water heater manufacturer and its 
affiliates may employ a

[[Page 37902]]

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 three manufacturers that 
qualify as domestic small businesses.
    The small business subgroup analysis is discussed in more detail in 
chapter 12 of the final rule TSD. DOE examines the potential impacts of 
this final rule on small business manufacturers in section VI.B of this 
document.
e. Cumulative Regulatory Burden
    One aspect of assessing manufacturer burden involves looking at the 
cumulative impact of multiple DOE standards and the regulatory actions 
of other Federal agencies and States 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. 
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.
    For the cumulative regulatory burden analysis, DOE examined 
Federal, product-specific regulations that could affect consumer water 
heater manufacturers and that take effect approximately 3 years before 
or after the estimated compliance date (2030). This information is 
presented in Table V.21.
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    DOE received several comments in response to the July 2023 NOPR 
about cumulative regulatory burden. DOE addresses those comments in 
section IV.J.3.b of this document.
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. National 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 
year of anticipated compliance with amended standards (2030-2059). 
Table V.22 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.

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    OMB Circular A-4 \181\ requires agencies to present analytical 
results, including separate schedules of the monetized benefits and 
costs that show the type and timing of benefits and costs. Circular A-4 
also directs agencies to consider the variability of key elements 
underlying the estimates of benefits and costs. For this rulemaking, 
DOE undertook a sensitivity analysis using 9 years, rather than 30 
years, of product shipments. The choice of a 9-year period is a proxy 
for the timeline in EPCA for the review of certain energy conservation 
standards and potential revision of and compliance with such revised 
standards.\182\ The review timeframe established in EPCA is generally 
not synchronized with the product lifetime, product manufacturing 
cycles, or other factors specific to consumer water heaters. Thus, such 
results are presented for informational purposes only and are not 
indicative of any change in DOE's analytical methodology. The NES 
sensitivity analysis results based on a 9-year analytical period are 
presented in Table V.23. The impacts are counted over the lifetime of 
consumer water heaters purchased during the period 2030-2038.
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    \181\ U.S. Office of Management and Budget. Circular A-4: 
Regulatory Analysis. Available at www.whitehouse.gov/omb/information-for-agencies/circulars (last accessed Jan. 18. 2024). 
DOE used the prior version of Circular A-4 (September 17, 2003) in 
accordance with the effective date of the November 9, 2023 version.
    \182\ 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. (42 U.S.C. 
6295(m)) 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.
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[[Page 37906]]


b. Net Present Value of Consumer Costs and Benefits
    DOE estimated the cumulative NPV of the total costs and savings for 
consumers that would result from the TSLs considered for consumer water 
heaters. In accordance with OMB's guidelines on regulatory 
analysis,\183\ DOE calculated NPV using both a 7-percent and a 3-
percent real discount rate. Table V.24 shows the consumer NPV results 
with impacts counted over the lifetime of products purchased during the 
period 2030-2059.
---------------------------------------------------------------------------

    \183\ U.S. Office of Management and Budget. Circular A-4: 
Regulatory Analysis. September 17, 2003. https://www.whitehouse.gov/wp-content/uploads/legacy_drupal_files/omb/circulars/A4/a-4.pdf 
(last accessed July 1, 2021).
[GRAPHIC] [TIFF OMITTED] TR06MY24.071

    The NPV results based on the aforementioned 9-year analytical 
period are presented in Table V.25. The impacts are counted over the 
lifetime of products purchased during the period 2030-2038. As 
mentioned previously, such results are presented for informational 
purposes only and are not indicative of any change in DOE's analytical 
methodology or decision criteria.
[GRAPHIC] [TIFF OMITTED] TR06MY24.072

    The previous results reflect the use of a default trend to estimate 
the change in price for consumer water heaters over the analysis period 
(see section IV.F.1 of this document). DOE also conducted a sensitivity 
analysis that considered one

[[Page 37907]]

scenario with a price decline compared to the reference case and one 
scenario with a price increase compared to the reference case. The 
results of these alternative cases are presented in appendix 10C of the 
final rule TSD. In the price-decline case, the NPV of consumer benefits 
is higher than in the default case. In the price increase case, the NPV 
of consumer benefits is lower than in the default case.
c. Indirect Impacts on Employment
    DOE estimates that amended energy conservation standards for 
consumer water heaters will reduce energy expenditures for consumers of 
those products, with the resulting net savings being redirected to 
other forms of economic activity. These expected shifts in spending and 
economic activity could affect the demand for labor. As described in 
section IV.N of this document, DOE used an input/output model of the 
U.S. economy to estimate indirect employment impacts of the TSLs that 
DOE considered. There are uncertainties involved in projecting 
employment impacts, especially changes in the later years of the 
analysis. Therefore, DOE generated results for near-term timeframes 
(2030-2034), where these uncertainties are reduced.
    The results suggest that the adopted standards are likely to have a 
negligible impact on the net demand for labor in the economy. The net 
change in jobs is so small that it would be imperceptible in national 
labor statistics and might be offset by other, unanticipated effects on 
employment. Chapter 16 of the final rule TSD presents detailed results 
regarding anticipated indirect employment impacts.
4. Impact on Utility or Performance of Products
    As discussed in section III.F.1.d of this document, DOE has 
concluded that the standards adopted in this final rule will not lessen 
the utility or performance of the consumer water heaters under 
consideration in this rulemaking. Manufacturers of these products 
currently offer units that meet or exceed the adopted standards.
5. Impact of Any Lessening of Competition
    DOE considered any lessening of competition that would be likely to 
result from new or amended standards. As discussed in section III.F.1.e 
of this document, EPCA directs the Attorney General of the United 
States (``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 in writing 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. To assist the Attorney General 
in making this determination, DOE provided the Department of Justice 
(``DOJ'') with copies of the NOPR and the TSD for review. In its 
assessment letter responding to DOE, DOJ concluded that the proposed 
energy conservation standards for consumer water heaters are unlikely 
to have a significant adverse impact on competition. DOE is publishing 
the Attorney General's assessment at the end of this final rule.
6. Need of the Nation To Conserve Energy
    Enhanced energy efficiency, where economically justified, improves 
the Nation's energy security, strengthens the economy, and reduces the 
environmental impacts (costs) of energy production. Reduced electricity 
demand due to energy conservation standards is also likely to reduce 
the cost of maintaining the reliability of the electricity system, 
particularly during peak-load periods. Chapter 15 in the final rule TSD 
presents the estimated impacts on electricity-generating capacity, 
relative to the no-new-standards case, for the TSLs that DOE considered 
in this rulemaking.
    Energy conservation resulting from potential energy conservation 
standards for consumer water heaters is expected to yield environmental 
benefits in the form of reduced emissions of certain air pollutants and 
greenhouse gases. Table V.26 provides DOE's estimate of cumulative 
emissions reductions expected to result from the TSLs considered in 
this rulemaking. The emissions were calculated using the multipliers 
discussed in section IV.K of this document. DOE reports annual 
emissions reductions for each TSL in chapter 13 of the final rule TSD.
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    As part of the analysis for this rule, DOE estimated monetary 
benefits likely to result from the reduced emissions of CO2 
that DOE estimated for each of the considered TSLs for consumer water 
heaters. Section IV.L of this document discusses the estimated SC-
CO2 values that DOE used. Table V.27 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 selected TSL in chapter 14 of the final rule TSD.
[GRAPHIC] [TIFF OMITTED] TR06MY24.074

BILLING CODE 6450-01-C
    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.28 presents the value of the 
CH4 emissions reduction at each TSL, and Table V.29 presents 
the value of the N2O emissions reduction at each TSL. The 
time-series of annual values is presented for the selected TSL in 
chapter 14 of the final rule TSD.

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[GRAPHIC] [TIFF OMITTED] TR06MY24.076

    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, however, that the adopted standards are economically 
justified even without inclusion of monetized benefits of reduced GHG 
emissions.
    DOE also estimated the monetary value of the economic 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.30 presents the present value 
for NOX emissions reduction for each TSL calculated using 7-
percent and 3-percent discount rates, and Table V.31 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 selected TSL in chapter 14 of the final rule TSD.
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[[Page 37910]]


[GRAPHIC] [TIFF OMITTED] TR06MY24.078

    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 
direct PM and other co-pollutants may be significant. DOE has not 
included monetary benefits of the reduction of Hg emissions because the 
amount of reduction is very small.
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.
8. Summary of Economic Impacts
    Table V.32 presents the NPV values that result from adding the 
estimates of the 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 products, and are measured for the 
lifetime of products shipped during the period 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 during the period 2030-
2059.
[GRAPHIC] [TIFF OMITTED] TR06MY24.079

C. 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 final rule, DOE considered the impacts of new and amended

[[Page 37911]]

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 up-front 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 final rule 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.\184\
---------------------------------------------------------------------------

    \184\ 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 estimated in the regulatory process.\185\ 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.
---------------------------------------------------------------------------

    \185\ 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 July 1, 2021).
---------------------------------------------------------------------------

1. Benefits and Burdens of TSLs Considered for Consumer Water Heater 
Standards
    Table V.33 and Table V.34 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. DOE is presenting monetized benefits of GHG emissions 
reductions in accordance with the applicable Executive orders, and DOE 
would reach the same conclusion presented in this notice in the absence 
of the social cost of greenhouse gases, including the Interim Estimates 
presented by the Interagency Working Group because the consumer 
benefits alone outweigh the costs of the adopted rule (as described in 
section V.C of this document). The efficiency levels contained in each 
TSL are described in section V.A of this document.
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    DOE first considered TSL 6, which represents the max-tech 
efficiency levels for all product classes. At TSL 6, the design options 
for GSWHs include condensing technology; the design options for ESWHs 
include heat pump technology; and the design options for oil-fired 
storage water heaters (``OSWHs'') include extra insulation and multi-
flue heat exchangers. TSL 6 would require extensive changes to the way 
manufacturers currently produce water heaters. At TSL 6, approximately 
2 percent of consumer water heater

[[Page 37914]]

shipments are expected to meet the required efficiency levels by the 
2030 compliance date. This includes approximately 0.2 percent of 
shipments for GSWHs, 17 percent of shipments for OSWHs, 1 percent of 
small ESWH, 5 percent of ESWH with an effective storage volume of less 
than 55 gallons (excluding small ESWH) shipments, and 11 percent of 
ESWHs with an effective storage volume greater than or equal to 55 
gallons shipments. 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 to the transition to 
accommodate these advanced technologies.
    TSL 6 would save an estimated 30.8 quads of energy, an amount DOE 
considers significant. Under TSL 6, the NPV of consumer benefit would 
be $30 billion using a discount rate of 7 percent, and $115 billion 
using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 6 are 803 Mt of 
CO2, 8,534 thousand tons of CH4, 4.7 thousand 
tons of N2O, 1,851 thousand tons of NOX, 127 
thousand tons of SO2, and 0.9 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 $43 billion. The estimated monetary value of the health 
benefits from reduced SO2 and NOX emissions at 
TSL 6 is $27 billion using a 7-percent discount rate and $77 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 $100 
billion. Using a 3-percent discount rate for all benefits and costs, 
the estimated total NPV at TSL 6 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 6, consumers will experience an average LCC cost of $285 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 $141. For electric storage water heaters 20 to 
35 gallons, consumers will experience an LCC cost of $750. For GSWHs, 
the consumers experiencing a net LCC cost is 70 percent, and for small 
ESWHs, the consumers experiencing a net LCC cost is 77 percent.
    At TSL 6, the projected change in INPV ranges from a decrease of 
$709.5 million to a decrease of $5.2 million, which corresponds to a 
decrease of 48.0 percent and a decrease of 0.4 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 $626.2 million to comply with standards set at TSL 
6. DOE understands that manufacturers would need to significantly 
upgrade their facilities to accommodate 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 3 percent of ESWH sales today 
(0.14 million units in 2023) to 100 percent 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 final rule. In sum, DOE is 
concerned that industry will not be able to transition to 100 percent 
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 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. Advanced-technology water heaters require the ability to work 
with refrigerants similar to that of 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.
    The Secretary concludes that at TSL 6 for consumer water heaters, 
the benefits of energy savings, positive NPV of consumer benefits, 
emission reductions, and estimated monetary value of the emissions 
reductions would be outweighed by economic impacts to manufacturers, 
primarily driven by the ramp up in scale and offerings needed to 
support both ESWH and GWSH efficiencies at TSL 6, the economic costs 
for small ESWH 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. 
Approximately 0.2 percent of gas storage water heater shipments and 
approximately 4 percent of all electric storage water heaters shipments 
would meet TSL 6 efficiencies by 2030. 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 heater 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 
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

[[Page 37915]]

ESWH product classes, including small ESWHs. Approximately 14 percent 
of consumer water heater shipments are expected to meet the TSL 5 
efficiency levels by the 2030 compliance date. The percentage of 
shipments expected to meet or exceed the efficiency levels in TSL 5 is 
the same as TSL 6 for all product classes except for GSWH. For GSWHs, 
approximately 23 percent of shipments are expected to meet TSL 5 
efficiencies by the compliance date of the amended 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 24.9 quads of energy, an amount DOE 
considers significant. Under TSL 5, the NPV of consumer benefit would 
be $33 billion using a discount rate of 7 percent, and $111 billion 
using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 5 are 462 Mt of 
CO2, 4,228 thousand tons of CH4, 4.1 thousand 
tons of N2O, 919 thousand tons of NOX, 128 
thousand tons of SO2, and 0.9 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 5 is $24 billion. The estimated monetary value of the health 
benefits from reduced SO2 and NOX emissions at 
TSL 5 is $16 billion using a 7-percent discount rate and $46 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 5 is $73 
billion. Using a 3-percent discount rate for all benefits and costs, 
the estimated total NPV at TSL 5 is $182 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 5, DOE estimates that consumers will see a life-cycle cost 
savings for all product classes, except for small ESWH. At TSL 5, the 
average LCC savings is $29 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, 77 percent of small ESWH consumers will experience a 
net cost when installing a split-system heat pump water heater.
    At TSL 5, the projected change in INPV ranges from a decrease of 
$478.1 million to a decrease of $31.3 million, which corresponds to a 
decrease of 32.3 percent and a decrease of 2.1 percent, respectively. 
DOE estimates that industry must invest $387.6 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. DOE estimates that manufacturers would need to 
scale up production of heat pump electric storage water heaters from 
approximately 3 percent of all ESWH units (0.14 million units in 2023) 
to 100 percent 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.
    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 concludes that at TSL 5 for consumer water heaters, 
the benefits of energy savings, positive NPV of consumer benefits, 
emission reductions, and 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 concluded that TSL 5 is not economically justified.
    DOE then considered TSL 4, which represents a lower efficiency 
level for ESWHs 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; and the 
design options for ESWHs include heat pump technology. Approximately 17 
percent of consumer water heater shipments are expected to meet the TSL 
4 efficiency levels by the 2030 compliance date. The percentage of 
shipments in 2030 expected to meet the analyzed level in TSL 4 for 
ESWHs is approximately 11 percent, which is a significant increase from 
the max-tech efficiency levels required at TSL 5 and TSL 6. However, 
for small ESWH, the percentage of shipments expected to meet TSL 4 
remains at approximately 1 percent. 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 ESWHs except 
for small ESWHs. DOE still expects this transition to be significant, 
but DOE notes that manufacturers have more experience producing ESWHs, 
excluding 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, would help support the expansion of this market.
    TSL 4 would save an estimated 24.3 quads of energy, an amount DOE 
considers significant. Under TSL 4, the NPV of consumer benefit would 
be $33 billion using a discount rate of 7 percent, and $111 billion 
using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 4 are 448 Mt of 
CO2, 4,078 thousand tons of CH4, 4.0 thousand 
tons of N2O, 886 thousand tons of NOX, 126 
thousand tons of SO2, and 0.9 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 $23 billion. The estimated monetary value of the health 
benefits from reduced SO2 and NOX emissions at 
TSL 4 is $16 billion using a 7-percent discount rate and $45 billion 
using a 3-percent discount rate.
    Using a 7-percent discount rate for consumer benefits and costs, 
health

[[Page 37916]]

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 $72 billion. Using a 3-
percent discount rate for all benefits and costs, the estimated total 
NPV at TSL 4 is $179 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, except for 
the small ESWH. 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 consumer 
water heaters today in very small volumes and would not be able to 
support the entire small ESWH market today. Similar to TSLs 5 and 6, 77 
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 
$420.1 million to a decrease of $31.2 million, which corresponds to a 
decrease of 28.4 percent and a decrease of 2.1 percent, respectively. 
DOE estimates that industry must invest $344.0 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 previously 
discussed, DOE estimates that manufacturers would need to scale up 
production of heat pump electric storage water heaters from 
approximately 3 percent of ESWH sales in 2023 to 100 percent of units 
in 2030.
    The Secretary concludes that at TSL 4 for consumer water heaters, 
the benefits of energy savings, positive NPV of consumer benefits, 
emission reductions, and 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-up 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 three million 
heat pump water heater units a year, while introducing new innovative 
products to meet consumers' needs and optimizing to produce lower-cost 
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 and 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 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. 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 previously noted, heat pump technology currently 
comprises approximately 3 percent of the electric storage water heater 
market. TSL 3 would shift 100 percent of electric storage water heaters 
to heat pumps, driving large investments in design of new heat pump 
offerings and new product capacity. Approximately 17 percent of 
consumer water heater shipments are expected to meet the TSL 3 
efficiency levels by the 2030 compliance date. The percentage of 
shipments expected to meet or exceed the efficiency levels at TSL 3 is 
the same as TSL 4 for all product classes except for ESWHs. The 
percentage of shipments in 2030 expected to meet the analyzed level in 
TSL 3 for ESWHs is approximately 11 percent. However, for small ESWHs, 
the percentage of shipments expected to meet TSL 3 remains at 
approximately 1 percent in 2030.
    TSL 3 would save an estimated 21.0 quads of energy, an amount DOE 
considers significant. Under TSL 3, the NPV of consumer benefit would 
be $25 billion using a discount rate of 7 percent and $88 billion using 
a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 3 are 379 Mt of 
CO2, 3,413 thousand tons of CH4, 3.5 thousand 
tons of N2O, 742 thousand tons of NOX, 109 
thousand tons of SO2, and 0.8 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 $20 billion. The estimated monetary value of the health 
benefits from reduced SO2 and NOX emissions at 
TSL 3 is $13 billion using a 7-percent discount rate and $38 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 $58 
billion. Using a 3-percent discount rate for all benefits and costs, 
the estimated total NPV at TSL 3 is $146 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, except for the small ESWH. Similar to TSLs 4, 5, and 6, 77 
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 
$391.5 million to a decrease of $39.8 million, which corresponds to a 
decrease of 26.5 percent and a decrease of 2.7 percent, respectively. 
DOE estimates that industry must invest $332.4 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.
    The Secretary concludes that at TSL 3 for consumer water heaters, 
the benefits of energy savings, positive NPV of consumer benefits, 
emission reductions, and 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

[[Page 37917]]

support the entire market for ESWHs, including the workforce transition 
needed to service and install all of these heat pump water heaters. 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 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 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 of this document. Approximately 24 percent of consumer 
water heater shipments are expected to meet the TSL 2 efficiency levels 
by the 2030 compliance date. The percentage of shipments expected to 
meet or exceed the efficiency levels at TSL 2 is the same as TSL 3 for 
all product classes except for small ESWHs. The percentage of shipments 
in 2030 expected to meet the TSL 2 efficiency levels for ESWHs is 
approximately 24 percent. However, since TSL 2 for small ESWHs 
represents the baseline efficiency level, all small ESWHs are expected 
to meet TSL 2 levels, compared to only 1 percent of small ESWH 
shipments at TSL 3. While DOE recognizes that TSL 2 is not the TSL that 
maximizes net monetized benefits, DOE has determined that TSL 2 is 
designed to achieve the maximum improvement in energy efficiency that 
is technologically feasible and economically justified.
    TSL 2 would save an estimated 17.6 quads of energy, an amount DOE 
considers significant. Under TSL 2, the NPV of consumer benefit would 
be $25 billion using a discount rate of 7 percent and $82 billion using 
a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 2 are 332 Mt of 
CO2, 3,058 thousand tons of CH4, 2.9 thousand 
tons of N2O, 665 thousand tons of NOX, 90 
thousand tons of SO2, and 0.6 ton 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 $17 billion. The estimated monetary value of the health 
benefits from reduced SO2 and NOX emissions at 
TSL 2 is $12 billion using a 7-percent discount rate and $33 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 $54 
billion. Using a 3-percent discount rate for all benefits and costs, 
the estimated total NPV at TSL 2 is $132 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 $29 for GSWHs, savings 
of $141 for OSWHs, savings of $859 for ESWHs (20 gal <= Veff 
<= 55 gal) excluding small ESWHs, and savings of $458 for ESWHs (55 gal 
< Veff <= 120 gal). The fraction of consumers experiencing a 
net LCC cost is 41 percent for GSWHs, 27 percent for OSWHs, 35 percent 
for ESWHs (20 gal <= Veff <= 55 gal) excluding small ESWHs, 
and 0 percent for ESWHs (55 gal < Veff <= 120 gal). 
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 
$275.3 million to an increase of $28.2 million, which corresponds to a 
decrease of 18.6 percent and an increase of 1.9 percent, respectively. 
DOE estimates that industry must invest $239.8 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 3 percent of ESWHs today to 61 percent 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 a major manufacturer sign on to the Joint Stakeholder 
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 
amended standards.\186\
---------------------------------------------------------------------------

    \186\ As detailed in II.B.2 of this document, Rheem is a 
signatory to the Joint Stakeholder Recommendation. BWC was an 
original signatory to the Joint Stakeholder Recommendation, which 
included a recommendation of heat pump levels for ESWHs with rated 
storage volumes greater than 35 gallons, but subsequently removed 
itself as a signatory after the July 2023 NOPR after raising 
concerns about how DOE proposed to align with the Joint Stakeholder 
Recommendation.
---------------------------------------------------------------------------

    After considering the analysis and weighing the benefits and 
burdens, the Secretary has 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 $17 billion in climate benefits (associated with 
the average SC-GHG at a 3-percent discount rate), and $12 billion 
(using a 7-percent discount rate) or $33 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 Recommendation. 
More specifically, DOE believes the Joint Stakeholder agreement from a 
cross section group of stakeholders provides DOE with a good indication 
of stakeholder views on this rulemaking

[[Page 37918]]

and 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 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 comprises efficiency levels that offer 
significant LCC savings while keeping the percentage of consumers 
experiencing a net cost at a modest level. In particular, lower-income 
homeowners who currently use small ESWHs are significantly less likely 
to be disproportionately impacted at TSL 2 than at higher TSLs. 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 
understands the ramp up to accommodate heat pump water heaters at TSL 2 
is still significant, DOE believes manufacturers can leverage their 
existing operations, knowledge, workforce networks, and R&D to scale at 
a level needed to support an amended 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 of this document, DOE does not 
expect any significant amount of switching across product classes as a 
result of the adopted standards, with the exception of ESWHs and small 
ESWHs. 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 final 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 adopts 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 adopts converted standards in the 
UEF metric based on the amended appendix E test procedure. Altogether, 
the new and amended energy conservation standards for consumer water 
heaters, which are expressed as UEF, are shown in Table V.35. Note that 
this table does not show product classes for which standards remain 
unchanged by this final rule.
BILLING CODE 6450-01-P

[[Page 37919]]

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[[Page 37920]]


BILLING CODE 6450-01-C
2. Annualized Benefits and Costs of the Adopted Standards
    The benefits and costs of the adopted standards can also be 
expressed in terms of annualized values. The annualized net benefit is 
(1) the annualized national economic value (expressed in 2022$) of the 
benefits from operating products that meet the adopted standards 
(consisting primarily of operating cost savings from using less 
energy), minus increases in product purchase costs, and (2) the 
annualized monetary value of the climate and health benefits.
    Table V.36 shows the annualized values for consumer water heaters 
under TSL 2, expressed in 2022$. 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 adopted 
in this rule is $2,623 million per year in increased equipment costs, 
while the estimated annual benefits are $5,655 million in reduced 
equipment operating costs, $1,051 in monetized climate benefits, and 
1,416 in monetized health benefits. In this case, the net benefit would 
amount to $5,499 per year.
    Using a 3-percent discount rate for all benefits and costs, the 
estimated cost of the standards is $2,586 million per year in increased 
equipment costs, while the estimated annual benefits are $7,566 million 
in reduced operating costs, $1,051 million in monetized climate 
benefits, and $2,033 million in monetized health benefits. In this 
case, the net benefit would amount to $8,065 million per year.
BILLING CODE 6450-01-P

[[Page 37921]]

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[[Page 37922]]


[GRAPHIC] [TIFF OMITTED] TR06MY24.084

BILLING CODE 6450-01-C
3. Conversion Factor Final Rule Enforcement Policy
    As discussed in section II.B.1 of this document, the currently 
applicable standards were established by the December 2016 Conversion 
Factor Final Rule, which utilized mathematical conversion equations to 
translate EF-based standards to the UEF metric for products that were 
on the market at the time. 81 FR 96204.
    In that final rule, DOE issued an enforcement policy to ensure that 
individual models manufactured prior to July 13, 2015 that complied 
with the existing EF standards and remained unchanged in design would 
be tested to the EF metric and not be harmed by the transition to the 
UEF metric. 81 FR 96204, 96226-96227. This was done to prevent 
``overrating'' to the minimum UEF standard; manufacturers are required 
to disclose the actual performance in the same metric as all other 
products. Id. The Department stated that these models will continue to 
remain subject to the enforcement policy until compliance with amended 
energy conservation standards is required. Id.
    As a result, today's market continues to offer consumer water 
heaters that do not meet the current UEF-based standards (this is 
depicted in appendix 3A to the TSD). This final rule adopts amended 
energy conservation standards for consumer water heaters. Upon the 
compliance date of this final rule, the 2016 enforcement policy is 
terminated for all water heaters.
4. Severability
    Finally, DOE added a new paragraph to 10 CFR 430.32 to make 
explicit the agency's intent that each energy conservation standard for 
each product class is separate and severable from one another, and that 
if any energy conservation standard for any product class is stayed or 
determined to be invalid by a court of competent jurisdiction, the 
remaining energy conservation standards for the other product classes 
shall continue in effect. Because this is an expression of DOE's 
intent, public comment on this paragraph is not relevant. This 
severability clause is intended to clearly express the Department's 
intent that should an energy conservation standard for any product 
class be stayed or invalidated, energy conservation standards for the 
other product classes shall continue in effect. In the event a court 
were to stay or invalidate one or more energy conservation standards 
for any product class as finalized, the Department would want the 
remaining energy conservation standards for the other product classes 
as finalized to remain in full force and legal effect.

D. 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 has not proposed 
to amend the product-specific certification requirements for these 
products in this standards rulemaking. These requirements will be 
addressed in a separate rulemaking.

[[Page 37923]]

    As discussed in section III.C of this document, DOE most recently 
amended the test procedure for these products at appendix E in the June 
2023 TP Final Rule.
    In light of the new and amended standards being adopted by this 
final rule, DOE is creating new provisions to specify how the appendix 
E test procedure should be applied. DOE is providing further 
clarifications around certain aspects of the appendix E test procedure 
to account for the products which would use this test procedure to 
determine UEF ratings. These amendments to the test procedure and 
related provisions are discussed in the following sections.
1. High-Temperature Testing
    The current DOE test procedure calls for an outlet water 
temperature of 125 [deg]F  5 [deg]F. 88 FR 40406, 40422. 
This temperature is consistent with data DOE has on water heater 
thermostat settings in the field. For example, as discussed in chapter 
7 of the final rule TSD, a 2015 study of 127 homes with electric 
resistance water heaters in central Florida showed that audited hot 
water setpoint temperatures averaged 127 [deg]F (52.8 [deg]C) (Std. 
Dev: 11.5 [deg]F (6.4 [deg]C)) and field measurement studies in 
California showed the median setpoint temperature to be 123 [deg]F 
(50.6 [deg]C). Additionally, as of 2017, survey data show that over 75% 
of contractors usually or always set the tank thermostat to 120 [deg]F 
(see chapter 7 of the final rule TSD).\187\ Further, the energy use 
analysis in this rulemaking uses water heater thermostat settings that 
are based on a 2006-2020 contractor survey conducted by Clear 
Seas.188 189 This annual survey of more than 300 plumbing/
hydronic heating contractor firms indicated that 41 percent of 
responding contractors always install a water heater with a setpoint 
temperature of 120 [deg]F, 20 percent always install with a setpoint 
temperature higher than 120 [deg]F, and 39 percent usually install with 
a setpoint of 120 [deg]F. DOE assumed that half of the latter portion 
installed the water heater at 120 [deg]F, resulting in an overall 
distribution of 61 percent of water heaters set to 120 [deg]F, and 39 
percent with setpoints uniformly distributed between 120 [deg]F and 140 
[deg]F, resulting in an average setpoint of approximately 124 [deg]F. 
In the July 2014 UEF TP Final Rule, DOE cited data that found the 
average set point temperature for consumer water heaters in the field 
is 124.2 [deg]F (51.2 [deg]C). 79 FR 40542, 40554. A compilation of 
field data across the United States and southern Ontario by Lawrence 
Berkeley National Laboratory had also found a median daily outlet water 
temperature of 122.7 [deg]F (50.4 [deg]C). Id. Taken together, these 
data indicate that the outlet water temperature of 125 [deg]F  5 [deg]F used in the DOE test procedure is representative of 
average water heater temperature settings in the field, with 120 [deg]F 
being the most common setting.
---------------------------------------------------------------------------

    \187\ Clear Seas Research. 2017 Water Heater Study. 
clearseasresearch.com (Last accessed: Dec. 1, 2023).
    \188\ Clear Seas Research. Water Heater Study. 2006. Plumbing 
and Mechanical.
    \189\ Clear Seas Research. 2020 Water Heater Study, available 
online at: clearseasresearch.com. (Last accessed: May 1, 2023).
---------------------------------------------------------------------------

    However, after the December 2016 Conversion Factor Final Rule 
issued amended standards for electric storage water heaters with rated 
storage volumes above 55 gallons that could only be met through the use 
of heat pump technology, DOE observed a market shift towards smaller 
electric storage water heater sizes where the standards could be met 
through electric resistance heating. These smaller water heaters have a 
setting or mode that continuously stores water at a higher temperature 
then uses a mixing valve to deliver water at the temperature setpoint. 
As a result, 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 with rated storage volumes less than 55 gallons but with 
significantly higher effective storage volumes due to higher storage 
tank temperatures. 88 FR 40406, 40446. DOE anticipates a similar market 
shift in response to this final rule as the new standards for electric 
storage water heaters with capacities greater than or equal to 20 
gallons and less than or equal to 55 gallons are met through the use of 
heat pump technology, while the standards for small electric storage 
water heaters (capacities greater than or equal to 20 gallons and less 
than or equal to 35 gallons) can be met by electric resistance heating 
technology.
    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 
these small electric storage water heaters as part of the regular 
operation of their water heater because consumers are electing to 
purchase an undersized water heater based on its capacity-boosting 
ability. Accordingly, for such products, a representative average use 
cycle 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. 88 FR 49058, 49164. However, before the June 
2023 TP Final Rule, the DOE test procedure did not have a provision for 
measuring energy use of water heaters that continuously store water at 
a higher temperature to boost capacity. The June 2023 TP Final Rule 
established a high-temperature test method that would allow consumers 
to compare the energy efficiency of water heaters that increase 
capacity through elevated storage temperatures with water heaters that 
use larger tank volumes to achieve the same capacity. However, DOE 
deferred the implementation of high-temperature testing provisions to 
this energy conservation standards rulemaking. 88 FR 40406, 40448. This 
has allowed DOE to consider details of the implementation to best suit 
the needs of the market in a standards-case-scenario.
    Whereas the June 2023 TP Final Rule established how to conduct a 
high-temperature test, this standards rulemaking establishes which 
products must use the high-temperature test method. In this final rule, 
DOE is adopting the proposed provisions for the application of the 
high-temperature test method, clarifying how the maximum tank 
temperature can be verified, adopting additional exemptions for very 
small and large electric storage water heaters, and permitting optional 
representations for heat pump water heaters using the high-temperature 
test method.
    DOE received the following general comments in response to the July 
2023 NOPR and December 2023 SNOPR regarding general support, 
applicability, and potential concerns around high-temperature testing 
and the use of effective storage volume. DOE also addresses information 
received regarding impacts associated with high-temperature testing.
    The Joint Advocacy Groups supported DOE's proposed implementation 
of the effective storage volume and high temperature testing 
provisions, stating their agreement with DOE's determination that high-
temperature testing is representative of the average use cycle for 
electric storage water heaters that offer consumers the ability to 
increase storage tank temperature. The Joint Advocacy Groups added that 
this proposal would also help ensure the expected savings from the 
proposed standards are realized. (Joint Advocacy Groups, No. 1165 at p. 
7) NEEA supported DOE's proposed use of effective storage volume and 
high-temperature testing, asserting that it would effectively inhibit 
the use of small, overheated tanks installed with mixing valves as a 
means of circumventing heat pump-level standards, and would ensure the 
energy savings projected in the NOPR are

[[Page 37924]]

realized. (NEEA, No. 1199 at pp. 7-8) CEC supported DOE's proposed 
high-temperature testing provisions, stating that they would close a 
significant loophole that would allow smaller, less-efficient storage 
water heaters to operate with higher effective storage volumes. (CEC, 
No. 1173 at p. 12) The Joint Stakeholders stated their support of the 
effective storage volume provisions, conditional on their narrow 
application to certain electric resistance storage water heaters, to 
aid in ensuring the expected savings from the proposed standards are 
realized.
    The CA IOUs agreed that rated storage volume is no longer an 
appropriate measure for hot water service and supported the transition 
to using the effective storage volume metric, stating that such an 
approach is consistent with comments that they and others have provided 
previously in this rulemaking. The CA IOUs noted that only certain 
electric resistance storage water heaters would be subject to the high-
temperature test method, and the effective storage volume would be 
equivalent to the rated storage volume for all other consumer water 
heaters. The CA IOUs recommended that DOE plainly state that high-
temperature testing is applicable only for those electric storage water 
heaters with a maximum set point temperature above 135 [deg]F, and that 
the effective storage volume for all other consumer water heaters is 
equal to the rated volume. (CA IOUs, No. 1175 at p. 2) The Joint 
Stakeholders also requested that DOE clarify the application of high-
temperature testing and effective storage volume requirements with 
regards to product classes other than electric storage water heaters. 
(Joint Stakeholders, No. 1156 at pp. 1-2)
    Rheem requested clarification on whether high-temperature testing 
is intended for electric instantaneous water heaters with rated storage 
volumes greater than or equal to 2 gallons. Rheem recommended that the 
high-temperature test method not apply to these products, as they are 
not direct replacements for heat pump water heaters. (Rheem, No. 1177 
at p. 3)
    To clarify, the high-temperature test method is applicable only to 
electric storage water heaters. It is not applicable to electric 
instantaneous water heaters. Consumer electric instantaneous water 
heaters, like consumer electric storage water heaters, are statutorily 
limited to an input rate of 12 kW (which corresponds to the typical 
household circuit limitations in residential buildings). (42 U.S.C. 
6291(27)(A)-(B)) Instantaneous-type water heaters have at least 4,000 
Btu/h of input per gallon of water stored. (42 U.S.C. 6291(27)(B)) 
Considering these two limitations, the maximum volume that a consumer 
electric instantaneous water heater could have is approximately 10 
gallons. For the reasons detailed in section V.D.1.c of this document, 
products of this size are unlikely to use elevated temperatures to 
directly replace the consumer utility of a water heater with a larger 
stored volume of water. And, in response to the CA IOUs' request, DOE 
clarifies the verification of the maximum tank temperature in section 
V.D.1.b of this document, which does more than simply state the 
applicability of the high-temperature test method is based on a maximum 
setpoint.
    NYSERDA supported the use of the effective storage volume and the 
high-temperature test method, but noted that, although the high-
temperature test applies only to certain electric storage water 
heaters, the appendix E test procedure would also result in an 
effective storage volume greater than rated storage volume for all 
other water heaters when Tmax,1 is greater than 130 [deg]F 
and also more than 5 [deg]F higher than the delivery temperature, 
Tdel,2.\190\ NYSERDA therefore asked for clarification on 
how the effective storage volume metric is applied to different water 
heaters. (NYSERDA, No. 1192 at pp. 5-6, 7)
---------------------------------------------------------------------------

    \190\ Tmax,1 is the maximum measured mean tank 
temperature after cut-out following the first draw of the 24-hour 
simulated-use test. Tdel,2 is the average outlet water 
temperature during the 2nd draw of the 24-hour simulated-use test. 
See section 1.15 of appendix E.
---------------------------------------------------------------------------

    DOE is maintaining the provisions in appendix E, which result in a 
higher effective storage volume to products that have an internal tank 
temperature five degrees above the delivery set point temperature in 
order to assess products on an equivalent effective storage volume 
basis. As discussed in the June 2023 TP Final Rule, this would 
typically only apply if the product has a built-in mixing valve and 
normally operates in a manner that elevates the storage tank 
temperature in its default mode. Therefore, the increased effective 
storage volume is representative of the actual performance of such a 
model in its default mode. In the June 2023 TP Final Rule, DOE 
presented test data which demonstrated that only models with this 
specific design had effective storage volumes greater than rated 
storage volumes, and that all other traditional models of storage water 
heaters were unaffected.
    GEA expressed support for DOE's proposals regarding high-
temperature testing and the scope of products to which it would apply. 
GEA stated that DOE's proposed rule appropriately recognizes the 
importance of integrated mixing valves and accounts for them. However, 
GEA concurred with AHRI's comments regarding needed clarifications to 
the test procedure and standard and to the appropriate temperature 
limits for high-temperature testing (which are discussed in more detail 
later in this section). (GEA, No. 1203 at pp. 1-2)
    Rheem agreed that the transition from electric resistance to heat 
pump storage water heaters presents an incentive to increase the 
temperature of an electric resistance storage water heater to increase 
the amount of hot water it can deliver. Rheem also stated that high-
temperature testing should only be valid for products that operate with 
a stored volume of water (i.e., storage-type or circulating). (Rheem, 
No. 1177 at p. 2) Relatedly, Rheem supported the application of the 
high-temperature test method to tabletop water heaters because these 
products can be used to replace heat pump water heaters. (Rheem, No. 
1177 at p. 3)
    Other commenters provided feedback for DOE to consider additional 
potential impacts of the high-temperature test method on the market. 
BWC stated that elements of the test procedure, such as the method for 
circulating water heaters and the application of high-temperature 
testing, appeared to be incomplete in the June 2023 TP Final Rule, and 
that DOE has continued to revise these aspects of the test procedure in 
the July 2023 NOPR. (BWC, No. 1164 at p. 7) AHRI raised concerns with 
the high-temperature test provisions for electric storage water 
heaters, stating that these provisions and their implications should 
have been fully addressed in the recent test procedure rulemaking 
because manufacturers require additional time to understand the 
proposal and how it would be implemented. AHRI stated that DOE has not 
provided clear direction in the July 2023 NOPR as to how the high-
temperature test will be applied and enforced. (AHRI, No. 1167 at p. 2) 
AHRI and its members asserted that DOE has not provided sufficient test 
data for stakeholders to understand the impacts of the high-temperature 
test method on electric resistance storage water heaters. (AHRI, No. 
1167 at p. 2)
    A.O. Smith commented that the purpose of the high-temperature test 
method was to prevent circumvention of heat pump-level standards for 
larger electric storage water heaters by means of using a smaller 
electric resistance storage water heater operating at a higher 
temperature. A.O. Smith also

[[Page 37925]]

noted that there may be additional avenues by which industry could 
avoid transitioning the market to heat pump water heaters. A.O. Smith 
recommended addressing these concerns in a supplemental NOPR prior to 
finalizing this rulemaking. A.O. Smith commented that understanding the 
relationship between maximum temperature offering, effective storage 
volume, FHR, and UEF is a prerequisite for evaluating the proposed 
efficiency levels for the electric storage water heater product 
classes. (A.O. Smith, No. 1182 at pp. 3-4)
    A.O. Smith also asserted that DOE has not provided justification 
nor testing data to demonstrate that the direct substitution of 
effective storage volume instead of rated storage volume will make up 
for the known negative impact that testing at higher temperatures will 
have on UEF. Citing EPCA, A.O. Smith noted that DOE must account for 
the change in efficiency resulting from an amended test procedure and 
recommended that DOE test baseline very small and small electric 
storage water heaters according to the new test procedure to ensure 
that the proposed standards do not result in a stringency increase. To 
this end, A.O. Smith also provided its own test data, which demonstrate 
the reduction in UEF as a result of the high-temperature test method. 
A.O. Smith recommended that DOE adjust the standards to allow for these 
reduced ratings to remain compliant and minimize manufacturer redesign 
burden. (A.O. Smith, No. 1182 at pp. 3-4)
    Rheem and A.O. Smith provided data that demonstrate the impact of 
high-temperature testing on these rated values for very small and small 
electric storage water heaters, while NEEA provided insights from its 
own testing regarding the relationship between temperature and FHR. 
(Rheem, No. 1177 at p. 21; A.O. Smith, No. 1182 at pp. 6-7) NEEA stated 
that the FHR increases by 2.5 gallons for every 5 [deg]F increase in 
tank temperature from 125 [deg]F. (NEEA, No. 1199 at pp. 7-8) Rheem 
stated that the boost in FHR from the high temperature will occur only 
for the first draw of the FHR test, and then afterwards the recovery 
rate will be the same, and the commenter provided an equation to 
estimate the increased FHR. (Rheem, No. 1177 at p. 21)
    DOE reviewed the information from Rheem, A.O. Smith, and NEEA in 
addition to its own test data to evaluate the impact of the high-
temperature test. For example, in the process of developing the June 
2023 TP Final Rule, DOE collected data on one 50-gallon electric 
storage water heater set to three different tank temperature set points 
(one of them being the maximum setting that would be used for the high-
temperature test method). 88 FR 40406, 40447.
    The results of DOE's assessments on very small electric storage 
water heaters follow in section V.D.1.c of this document. DOE's 
calculations and data from stakeholders have led DOE to conclude that 
the high-temperature test method should not be required for very small 
electric storage water heaters.
    In its own modeling analysis, Rheem identified that electric 
storage water heaters with rated storage volumes between 20 and 35 
gallons would be noncompliant with the proposed standards if tested to 
the high-temperature test method, and therefore, all such products 
would have to be redesigned to use an exemption. (Rheem, No. 1177 at p. 
2)
    DOE has identified 35 certified basic models of small electric 
storage water heaters in its market assessment (see appendix 3A to the 
final rule TSD) and determined that all of these models heat water 
using electric resistance elements and, as currently designed, do not 
meet any of the criteria for an exemption to the requirement to 
determine UEF according to the high temperature test method. For 
example, most of these products are likely capable of heating and 
storing water at or above the temperature threshold criterion that 
would, if they were capable of only heating and storing water at that 
temperature or less, exempt them from high temperature testing (the 
temperature criterion is discussed in more detail in the following 
section of this document). (Heat pump small electric storage water 
heaters, discussed later in this paragraph, were not certified to DOE.) 
Based on the calculations provided by Rheem and NEEA, DOE has 
determined that the vast majority of these small electric storage water 
heaters are capable of achieving an FHR of more than 51 gallons when 
set to the highest temperature set point (as would be required under 
high-temperature testing), and thus these products would qualify for 
the medium draw pattern when tested to the high-temperature test 
method. As such, these products would be subject to the standards for 
electric storage water heaters under 55 gallons generally and not the 
standards for small electric storage water heaters, which are 
applicable only for products in the very small and low draw patterns. 
Further, the models that would remain in the low draw pattern (having 
an FHR less than 51 gallons) would have an effective storage volume 
greater than 35 gallons, such that they would not be considered small 
electric storage water heaters, either. Therefore, these specific small 
electric storage water heaters would be subject to standards being 
adopted for electric storage water heaters with 20-55 gallons of 
storage volume generally (i.e., the standards for small electric 
storage water heaters would not apply), which are met through use of 
heat pump technology, unless they are redesigned to be eligible for one 
of the exemptions from high-temperature testing. If a product were 
redesigned to become eligible for an exemption, then the high-
temperature test method would not be required, and thus these electric 
resistance products would remain as small electric storage water 
heaters and be subject to the standards being adopted for small 
electric storage water heaters, which can be met using electric 
resistance heating.
    Additionally, in response to A.O. Smith's concern regarding the 
potential need to adjust small electric storage water heater standards 
to account for the impact of the high-temperature test, DOE notes that 
redesigns to the thermostat capabilities of electric storage water 
heaters are expected to be relatively low-cost for manufacturers, and 
products redesigned in such a manner would still be able to serve the 
majority of the market based on consumer field usage data (as described 
above). In a final rule amending test procedures for commercial water-
heating equipment, DOE evaluated the implications of removing a 
temperature criterion of 180 [deg]F that previously was part of the 
definition of a commercial water heater. 81 FR 79261, 79285 (Nov. 10, 
2016). In that final rule, it was discussed that redesigning water 
heaters to account for the 180 [deg]F temperature threshold can be 
achieved through replacement of a single part, the thermostat, which 
can be very easily and inexpensively changed to allow for heating water 
to greater than 180 [deg]F. Id. In 2016 A.O. Smith commented that a 
thermostat designed to deliver water temperatures in excess of 180 
[deg]F can be installed at no additional cost on products that are 
consumer water heaters in all other respects. Id. (See also A.O. Smith, 
Docket No. EERE-2014-BT-TP-0008, No. 27 at pp. 6-7). In light of these 
previous stakeholder comments there is no reason to believe that, for 
small electric storage water heaters, redesigning models to limit the 
temperature to 135 [deg]F would increase the price of the product. 
Hence, DOE expects thermostat redesigns to become a common strategy for 
manufacturers to offer small electric storage water heaters

[[Page 37926]]

after the compliance date of this final rule.
    However, this does not mean that all small electric storage water 
heaters available today would require redesign to be compliant with the 
amended standards set forth in this final rule. As discussed in section 
V.D.1.d of this document, the high-temperature test method is not 
required for heat pump water heaters; therefore, the high-temperature 
test method would not affect heat pump configurations on the market 
today. For example, consumers can continue to use circulating heat pump 
water heaters in small electric storage water heater configurations 
(i.e., with small separate tanks) for cases where a small electric 
storage water heater is desired but without the specific design 
exemptions that electric resistance products would require. DOE has 
identified four recent models on the market--two of which have been 
marked for sale in the United States-- which offer this 
capability.\191\
---------------------------------------------------------------------------

    \191\ Product literature for models of heat pump small electric 
storage water heaters can be found docketed at www.regulations.gov/docket/EERE-2017-BT-STD-0019. In the December 2023 SNOPR the 
Department had erroneously stated that there are no longer heat pump 
circulating water heaters available on the market (see 88 FR 89330, 
89333) due to changes in a manufacturer's website.
---------------------------------------------------------------------------

    Consequently, DOE concludes that no compliant products on the 
market today will be required to use the high-temperature test method 
in order to demonstrate compliance with the standards being adopted in 
this final rule. Therefore, DOE is not establishing any specific 
enforcement provisions beyond the requirements of the appendix E test 
procedure with regards to the high temperature test method.
    DOE recognizes that there may be additional ways for industry to 
develop alternatives to heat pump water heaters for consumers; however, 
DOE aims to have all products that offer the same performance, 
capacity, and consumer utility be treated equally under standards. The 
development and implementation of the high-temperature test method is 
one way to assure this for products that vary temperature to accomplish 
these ends. In addition to this, DOE is amending the definitions of the 
product classes to more accurately capture the branches of the market 
under which performance, capacity, and consumer utility can be grouped. 
This is discussed in section IV.A.1.e of this document.
    PHCC commented that the storage temperature cannot be raised beyond 
the ability of a mixing valve to safely regulate the outlet water 
temperature, and that mixing valves are not inexpensive. PHCC asserted 
that the device itself can be 25 percent to 30 percent of the cost of 
the water heater itself, and along with additional labor, material, 
maintenance, and operational costs, which the commenter suggested would 
result in mixing valves not being a commonly used solution today. PHCC 
also warned that installation of water heaters at elevated temperatures 
without a mixing valve causes a serious safety risk in addition to 
increased standby losses. In its comment, PHCC stated that the creation 
of the limited capacity will almost ensure that the high-temperature 
outcomes will happen, and if so, DOE should consider mandating mixing 
valves to ensure safety for consumers. (PHCC, No. 1151 at p. 2)
    The price of a mixing valve and its installation would vary 
depending on whether the mixing valve is shipped with the water heater, 
built into the water heater, or part of a standard installation kit. 
DOE understands the estimate of a mixing valve being 25 to 30 percent 
of the water heater's material price may reflect a separately purchased 
mixing valve. However, as discussed throughout this rulemaking and the 
most recent test procedure rulemaking, water heaters with built-in 
mixing valves or with mixing valves in the water heater's installation 
kit could become more common. Based on DOE's teardown analyses (as 
described in section IV.C.1.c of this document and chapter 5 of the 
final rule TSD), mixing valves that are provided by the water heater 
manufacturer could be significantly less expensive than ones purchased 
separately due to the volume in which water heater manufacturers can 
supply these. In the LCC analysis, DOE uses an estimate of 
approximately $75 per unit material price (before markup) based on the 
aforementioned teardown analyses assuming that the mixing valve can 
likely be provided by the water heater manufacturer in a scenario with 
amended standards.
    While DOE agrees with PHCC that mixing valves are a safety feature 
and should be used to temper extra-hot water to a degree that does not 
pose such a high scalding risk, the Department notes that EPCA does not 
delegate DOE the authority to issue regulations mandating such a 
consumer safety feature. Instead, DOE is statutorily obligated to 
ensure that its energy conservation standards can be met by products 
that are safe for consumers (see the screening analysis criteria in 
section IV.B). In its analysis of amended standards for consumer water 
heaters in this final rule, DOE has determined that the standards for 
small electric storage water heaters can be met by products that either 
limit the high temperature capability or are compatible with mixing 
valves in order to protect consumers from scalding.
    Therefore, as stated earlier, in this final rule, DOE is adopting 
the proposed provisions for the high-temperature test method, 
clarifying how the maximum tank temperature can be verified, adopting 
additional exemptions for very small and large electric storage water 
heaters, and permitting optional representations for heat pump water 
heaters using the high-temperature test method.
a. Maximum Tank Temperature
    In the July 2023 NOPR, DOE proposed that certain water heaters that 
have a maximum setpoint temperature capable of heating and storing 
water above 135 [deg]F would be required to conduct the high 
temperature test, while water heaters that can only heat and store 
water at or below 135 [deg]F would not be required to undergo such 
testing. 88 FR 49058, 49165. In arriving at the 135 [deg]F setpoint, 
DOE considered: (1) the effective storage volume of a small electric 
storage water heater with a rated storage volume of 35 gallons for 
various mean tank temperatures; and (2) potential consumer uses for 
higher storage tank temperatures. Id. The effective storage volume at 
various temperatures provides insight into the likelihood a small 
electric storage water heater would operate in a capacity-boosting 
mode, and in the July 2023 NOPR the Department provided a table that 
showed the effective storage volume for various tank temperature 
settings. Table V.37 from the July 2023 NOPR is reproduced here also. 
Id.

[[Page 37927]]

[GRAPHIC] [TIFF OMITTED] TR06MY24.085

    For instance, it is unlikely a consumer would purchase a 35-gallon 
small electric storage water heater and set the tank temperature to 130 
[deg]F to increase the effective storage volume to 38 gallons, which is 
less than a 9 percent increase in effective storage volume. On the 
other hand, at a maximum setpoint of 140 [deg]F, a 35-gallon small 
electric storage water heater could replace up to a 44-gallon heat pump 
water heater, which represents more than a 25 percent increase in 
effective capacity. Id. The market share of medium electric storage 
water heaters around 40 gallons is approximately 40 percent. As a 
result, DOE proposed a maximum temperature setpoint of 135 [deg]F.
    However, DOE also recognizes that increased capacity is not the 
only reason a consumer may want a higher tank storage temperature. 
Higher temperature setpoints can allow consumers to pair water heaters 
with clothes washers or dishwashers that lack heating elements and can 
be used to reduce bacterial growth. While the data shows that only a 
small percentage of consumers are utilizing tank temperature setpoints 
greater than 135 [deg]F, DOE notes that the 135 [deg]F maximum 
temperature setpoint is not a temperature limit. There are heat pump 
models of small electric water heaters available on the market that are 
exempt from the high temperature testing provisions and have 
temperature setpoints of 140 [deg]F or higher.\192\ Additionally, DOE 
proposed that units capable of storing water at a setpoint above 135 
[deg]F only through a temporary, consumer-initiated mode lasting no 
longer than 120 hours would not be subject to high temperature testing. 
This would allow consumers to initiate the temporary, high-heat mode 
prior to using a clothes washer or dishwasher that lacks a heating 
element for special cleaning loads, e.g., when dust mites or norovirus 
may be of particular concern. This temporary mode would also allow 
consumers to periodically raise the temperature of the tank past 135 
[deg]F to quickly eliminate any bacteria growth in the tank. For 
instance, if a consumer shuts their water heater off or puts it into a 
low-temperature vacation mode to conserve energy while not in use, they 
can use the temporary, high-heat mode to quickly eliminate any bacteria 
in the tank. Finally, DOE also notes that a setpoint of 135 [deg]F is 
well within the range of many recommendations for controlling bacteria 
growth in storage water heaters.\193\
---------------------------------------------------------------------------

    \192\ Product literature for models of heat pump small electric 
storage water heaters can be found docketed at www.regulations.gov/docket/EERE-2017-BT-STD-0019. See, for example, models marketed to 
reach up to 145 [deg]F: www.nyle.com/wp-content/uploads/2023/01/SB-E008T-010323.pdf and www.heatwater.com/wp-content/uploads/2021/09/SB-C6-112923.pdf (Last accessed Jan. 18, 2024).
    \193\ According to the CDC, legionella generally grow well 
between 77 [deg]F and 113 [deg]F, but growth slows between 113 
[deg]F and 120 [deg]F, and legionella begin to die above 120 [deg]F. 
See the CDC's Legionella Environmental Assessment Form. Centers for 
Disease Control and Prevention. Available online at www.cdc.gov/legionella/downloads/legionella-environmental-assessment-p.pdf. 
(Last accessed: Jan. 18, 2024).
---------------------------------------------------------------------------

    In response to the July 2023 NOPR, the Joint Advocacy Groups 
supported the proposed 135 [deg]F threshold for high temperature 
testing provisions, adding that a threshold of 140 [deg]F could 
significantly undermine the intent of the proposed standards by 
allowing 35-gallon water heaters to reach an effective storage volume 
of 44 gallons without being tested in a representative manner. The 
Joint Advocacy Groups also agreed with DOE's tentative determination 
that the proposed 135 [deg]F threshold would not compromise the utility 
of the water heater for consumers who desire hotter water for certain 
situations. (Joint Advocacy Groups, No. 1165 at pp. 7-8) NEEA also 
urged DOE not to set the limit to require high-temperature testing any 
higher than 135 [deg]F. (NEEA, No. 1199 at pp. 7-8)
    BWC, on the other hand, urged DOE to consider increasing the 
temperature criterion for the high-temperature test exemption from 135 
[deg]F to 140 [deg]F because residential electric storage water heaters 
that heat water to 140 [deg]F serve a distinct health and safety 
function, as the Centers for Disease Control (``CDC'') recommends 
maintaining this temperature to mitigate the formation or presence of 
legionella bacteria. (BWC, No. 1164 at p. 9) AHRI also suggested that 
the temperature criterion for the high-temperature test exemptions be 
increased to 140 [deg]F because setting the internal tank temperature 
to 140 [deg]F may produce significant health and safety benefits to 
consumers (i.e., killing legionella, norovirus, and dust mites). AHRI 
provided information that showed that washing clothes and bedding at 
140 [deg]F is one of the suggested guidelines that healthcare agencies 
provide to kill dust mites and norovirus. Additionally, AHRI cited 
information from the CDC, which recommends storing hot water above 140 
[deg]F to control for legionella. (AHRI, No. 1167 at p. 3-4)
    A.O. Smith similarly commented that a temperature of 140 [deg]F is 
recommended to wash bedding and linens to kill dust mites and 
norovirus. The commenter also referenced DOE's website, which 
recommends that people with suppressed immune systems may want

[[Page 37928]]

to keep their tank temperature at 140 [deg]F and install limited 
devices on taps and baths. A.O. Smith stated that several codes, 
including the National Plumbing Code of Canada,\194\ require electric 
resistance storage water heaters to be shipped at a 140 [deg]F set 
point; therefore, allowing a 140 [deg]F set point would reduce 
manufacturer burden from having to produce separate model lines for the 
United States and Canada. (A.O. Smith, No. 1182 at p. 6) A.O. Smith 
collected data on water heater temperatures from a survey of 500 
homeowners. The data, A.O. Smith stated, showed that 63 percent of 
respondents adjusted the water heater set point from the factory-
shipped temperature.\195\ Of those who adjusted the set point, 45 
percent increased the set point, 38 percent decreased the set point, 
and 17 percent had done both. A.O. Smith also gathered data from 40-
gallon ``connected'' water heaters \196\ which showed that a total of 
10 percent of customers have set the temperature higher than 135 
[deg]F, whereas 5 percent of customers have the temperature higher than 
140 [deg]F. A.O. Smith argued that it believes a threshold of 140 
[deg]F for exemption from high-temperature testing better maintains 
consumer utility. (A.O. Smith, No. 1182 at p. 6)
---------------------------------------------------------------------------

    \194\ National Plumbing Code of Canada 2020, page 200. Available 
online at: nrc-publications.canada.ca/eng/view/ft/?id=6e7cabf5-d83e-
4efd-9a1c-6515fc7cdc71r. (Last accessed: Oct. 31, 2023).
    \195\ DOE notes that clause 23.3 of UL Standard 174, ``Household 
Electric Storage Tank Water Heaters,'' was recently updated to 
require that the temperature-regulating control shall be set before 
leaving the factory to a control position corresponding to a water 
temperature no higher than 51.7 [deg]C (125 [deg]F). When the water 
heater is equipped with a thermostatic mixing valve in addition to 
the temperature regulating control, the factory setting of the water 
temperature mixing valve shall be no higher than 51.7 [deg]C (125 
[deg]F), and the temperature-regulating control shall be factory set 
no higher than 60 [deg]C (140 [deg]F). These updates went into 
effect on October 14, 2023. This standard can be accessed online 
at:www.shopulstandards.com/ProductDetail.aspx?productId=UL174_11_S_20040429. (Last accessed: 
Nov. 30, 2023).
    \196\ A.O. Smith did not specify whether these units were 
connected to a utility demand-response program or were otherwise 
equipped with WiFi-enabled controls and monitoring.
---------------------------------------------------------------------------

    Rheem noted that the EF test procedure, which had been in use for 
over 25 years, had a representative nominal tank temperature between 
130 and 140 [deg]F, so a temperature of 140 [deg]F is representative 
for a subset of water heaters in the field today. Rheem stated that, in 
addition to requirements in Canada, the CDC also recommends temperature 
control limits that store hot water above 140 [deg]F. (Rheem, No. 1177 
at p. 4)
    Finally, the CA IOUs strongly recommended that the temperature 
criterion for the high-temperature test method exemptions be reduced to 
no more than 130 [deg]F. The CA IOUs expressed concern that a 
temperature as high as 135 [deg]F would still enable small electric 
storage water heaters to directly compete with a larger heat pump water 
heaters and erode the anticipated savings from heat pump-level 
standards. The CA IOUs calculated that if a lowboy water heater with 35 
gallons of rated storage volume and a 51-gallon FHR were to operate at 
135 [deg]F with a thermostatic mixing valve, it would have an effective 
storage volume of 42 gallons and a new FHR of 56 gallons--which would 
appear to be in the range of the 20-55 gallon electric storage water 
heater class. Therefore, the CA IOUs stated that the high-temperature 
test should be required for electric storage water heaters that have a 
permanent mode or setting in which the water heater is capable of 
heating and storing water above the test procedure design temperature 
of 125 [deg]F. (CA IOUs, No. 1175 at pp. 3-4)
    First, in response to A.O. Smith's concern about manufacturer 
burden, DOE notes that harmonizing the factory-shipped setpoint 
temperature between the United States and Canada may not eliminate 
manufacturer burden. Specifically, the current minimum efficiency 
requirements for electric resistance storage water heaters are 
different in Canada, and several manufacturers currently offer distinct 
models in Canada to meet these requirements. See chapter 3 of the final 
rule TSD for more details on Canada's minimum efficiency requirements.
    With respect to the comments on both raising and lowering the 
maximum setpoint temperature proposed in the July 2023 NOPR, DOE first 
notes that the maximum setpoint temperature is based on the expected 
use for these products. Data show that consumers do not generally use 
very high temperature setpoints even in light of CDC guidance, so the 
``upper limit'' of temperatures found in normal installations appears 
to be lower than the 140 [deg]F suggested by some stakeholders.
    In the July 2023 NOPR, DOE tentatively determined that small 
electric storage water heaters that can heat and store water above 135 
[deg]F will be substantially more likely to be used permanently at 
higher temperatures to increase capacity (as discussed in section V.D.1 
of this document). Commenters advocating for a higher maximum setpoint 
temperature of 140 [deg]F do not dispute DOE's determination that small 
electric storage water heaters that can heat and store water above 135 
[deg]F will be substantially more likely to be used permanently at 
higher temperatures to increase capacity. Instead, they focus on the 
health and safety benefits of setting the tank temperature to 140 
[deg]F. DOE recognizes that higher temperatures, e.g., 140 [deg]F, can 
more quickly control bacterial growth in storage water heaters. But, as 
discussed previously, DOE is not limiting the maximum temperature 
setpoint for small electric water heaters. Based on DOE's and A.O. 
Smith's data, approximately 10% of consumers use a setpoint temperature 
greater than 135 [deg]F. For these consumers who prefer setpoint 
temperatures greater than 135 [deg]F, there are small electric heat 
pump water heaters on the market today that have setpoint temperatures 
above 140 [deg]F, and these models would not be affected by the high-
temperature testing provision. Further, as noted earlier, the temporary 
mode exemption will allow owners of electric resistance storage water 
heaters to periodically increase the temperature above 135 [deg]F, and 
for up to 120 hours (or five days) at a time, if desired for short-term 
disinfection applications.
    With respect to the comment from the CA IOUs that DOE lower the 
temperature to 130 [deg]F, DOE thinks it is unlikely that a consumer 
would purchase a 35 gallon small electric water heater and operate it 
at 130 [deg]F to increase the capacity by 3 gallons. While Rheem 
suggested that DOE refer to the outdated EF test procedure to determine 
what temperatures are considered typical, the current UEF test 
procedure can provide more recent insight. The current test method is 
based on a normal delivery temperature of 125 [deg]F  5 
[deg]F (as discussed previously), and within this normal range, 
consumer storage-type water heaters may sometimes contain water at 130 
[deg]F due to natural deviations from the setpoint temperature.
    For example, commercially available electric storage water heaters 
that are marketed today to boost the capacity using higher storage tank 
temperatures all do so with temperatures above 135 [deg]F. One product 
tested by DOE has a ``High'' setting that results in a tank temperature 
of about 140 [deg]F, and the setting below that resulted in a tank 
temperature of 125 [deg]F. There was no setting observed to boost 
capacity at a tank temperature of 135 [deg]F. Another manufacturer 
offers a 55-gallon product 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. 
88 FR 40406, 40446.

[[Page 37929]]

At the lowest level of capacity boosting, this model is offering 18 
percent additional effective storage volume (going from 55 gallons to 
65 gallons), which would indicate a temperature around 140 [deg]F as 
well. These designs demonstrate that storing water at 140 [deg]F is a 
useful temperature for boosting capacity, whereas 135 [deg]F may not 
be.
    Crystal also recommended that DOE review the allowed usage of 
germicidal UV-C water treatment in recirculating hot- and warm-water 
lines to complement or substitute thermal disinfection cycles. 
According to Crystal, this is allowed under regulation in several 
countries around the world, and therefore products and research are 
available on the market as well as ongoing novel technology adoptions 
improving the sustainability and energy efficiency and maintenance of 
this field further. (Crystal, No. 577 at p. 1)
    DOE has not found examples of consumer water heaters using UV 
treatment to disinfect hot water lines. However, to address issues like 
this, one manufacturer produces a point-of-use water heater that uses 
ozone generation to disinfect the water in the pipes and at the faucet 
while still delivering hot water at a temperature that is comfortable 
for hand-washing (the unit is advertised to have a maximum set point 
temperature of 120 [deg]F).\197\ Additionally, circulating water 
heaters (discussed more in section IV.A.1.a of this document) are a 
type of storage water heater that can maintain the water in the pipes 
at a high temperature so that all of the water in the system stays at a 
safe temperature and does not stagnate. The high temperature test will 
not impede the function of either of these types of products, as 
discussed later. Another manufacturer uses an antimicrobial enamel 
coating inside the water heater tank to prevent the growth of bacteria, 
mold, and mildew on the surface of the tank lining (though it is not 
advertised to specifically prevent legionella growth).\198\
---------------------------------------------------------------------------

    \197\ For more information, see product literature available 
online at: www.intellihot.com/wp-content/uploads/2023/01/Legionator-Product-Spec-Sheet-2.23.pdf. (Last accessed: Nov. 28, 2023).
    \198\ For more information, see product press release available 
online at: www.microban.com/bradford-white. (Last accessed: Nov. 29, 
2023).
---------------------------------------------------------------------------

b. Verification of Maximum Tank Temperature
    As discussed in the previous section, in the July 2023 NOPR, DOE 
proposed that products that are unable to heat and store water at a set 
point above 135 [deg]F would not be required to test using the high-
temperature test method. 88 FR 49058, 49165. DOE received the following 
comments in response to the July 2023 NOPR requesting clarification on 
the maximum tank temperature, how it is measured, and specific 
tolerances around required values as well as criteria for products 
exempt of the high-temperature test method.
    BWC asked for DOE to further clarify what design factors would 
constitute a product that is not capable of heating and storing water 
above 135 [deg]F. Specifically, BWC sought additional information on 
whether the exemption criteria would be based on a direct user 
interface function which operates the product or, instead, a thermostat 
capable of being set above 135 [deg]F. The commenter provided examples 
of configurations with surface-mount thermostats and electronic 
controls, with and without mixing valves, to inquire whether these 
configurations would be exempt from the high temperature test. (BWC, 
No. 1164 at pp. 7-8)
    AHRI asked DOE to elaborate on how it would enforce the high-
temperature test method. The commenter stated that most electric 
storage water heaters utilize a surface-mount thermostat, which is 
unsophisticated and has a large temperature tolerance--as a result, the 
mean tank temperature may vary appreciably from the temperature set 
point. AHRI stated that the mean tank temperature will typically be 
lower than the thermostat setting. As a result, AHRI requested feedback 
on whether the enforcement of the high-temperature test method would be 
based on thermostat set points or on test data (in the case that it is 
test data, AHRI recommended a temperature tolerance of  5 
[deg]F on Tmax,1 prior to requiring high-temperature testing 
in appendix E). AHRI recommended that DOE measure the maximum tank 
temperature using the Tmax,1 measurement in the simulated-
use test because it is commonly used in the industry to evaluate the 
effective storage volume and is referenced in the regulations already 
(manufacturers and labs are familiar with how to test for 
Tmax,1, and there would be minimal burden associated with 
determining the tank temperature based on this metric). (AHRI, No. 1167 
at p. 4)
    A.O. Smith also requested that DOE clarify how the temperature 
criterion for the high-temperature test is determined--whether it is a 
set point or whether it is a measurement. A.O. Smith stated that 
additional specificity is necessary because most electric resistance 
storage water heaters on the market use mechanical controls (e.g., bi-
metallic thermostats) which turn the elements on and off, resulting in 
larger temperature variation around the set point. A.O. Smith also 
requested that DOE clarify the enforcement provisions surrounding the 
level of external consumer intervention required to be exempt from the 
high-temperature test. (A.O. Smith, No. 1182 at p. 5)
    Rheem requested clarification on how the maximum temperature a 
water heater is capable of storing water at is measured (whether it be 
the maximum temperature on the thermostat settings, the maximum 
temperature within the tank, the maximum mean tank temperature, or the 
maximum outlet temperature as measured by a test in section 29 of UL 
174-2021.6.\199\ Rheem recommended the use of Tmax,1 to 
verify the temperature that a water heater can heat and store water to. 
(Rheem, No. 1177 at p. 5) Rheem recommended that DOE require 
certification and disclosure in product literature of the maximum 
temperature, FHR, and UEF when tested to the high-temperature 
requirements. Rheem also recommended that DOE establish enforcement 
provisions to ensure the maximum temperature aligns with the certified 
values. Rheem commented that a tolerance of  5 [deg]F for 
the maximum tank temperature and  3 percent on the 
effective storage volume would be necessary due to variability in the 
test procedure and the imprecise operation of bi-metallic thermostat 
controllers. Rheem also asked for clarification on how DOE would 
conduct enforcement testing, and if DOE will run tests at both 
temperature conditions, then what steps must be taken between the two 
simulated-use tests. (Rheem, No. 1177 at p. 6)
---------------------------------------------------------------------------

    \199\ See UL 174-2021.6, UL Standard for Safety Household 
Electric Storage Tank Water Heaters.
---------------------------------------------------------------------------

    In response to these requests for clarification, DOE clarifies that 
the exemption will be determined based on Tmax,1, which is a 
measured parameter in the current test procedure that represents the 
maximum measured mean tank temperature after cut-out following the 
first draw of the 24-hour simulated-use test. In order to develop 
product-specific enforcement provisions for the high-temperature test 
method, DOE must first identify whether manufacturers should certify 
this value privately; as such, a certification was not suggested in the 
July 2023 NOPR. DOE is deferring this determination to a separate 
rulemaking addressing certification and enforcement provisions for 
consumer water heaters and is not codifying any specific requirements 
in this final rule.
    In addition to this topic, Rheem suggested that, instead of 
conducting the high-temperature test at the

[[Page 37930]]

maximum tank temperature, the high-temperature test should be conducted 
at a standardized temperature. Rheem recommended that the high-
temperature test be performed at 160 [deg]F  5 [deg]F as a 
representative temperature for this type of water heater operation by 
2029. Rheem stated that 160 [deg]F is in between the 135 [deg]F 
temperature criterion and the 180 [deg]F maximum temperature (given 
that UL 174-2021 safety standard limits the maximum tank temperature to 
185 [deg]F). Rheem commented that future demand-response programs will 
also require operation at or above 160 [deg]F. (Rheem, No. 1177 at p. 
5)
    In response to Rheem's request for a fixed set point temperature 
for high-temperature testing, DOE notes that not all water heaters with 
the capability to store water above 135 [deg]F will necessarily have 
the capability to store water at 160 [deg]F; hence, DOE is not adopting 
any changes to the set point requirements for the high-temperature test 
method. While the test may not be carried out at the exact temperature 
to which the water heater would be set in the field, it would be 
representative of the maximum temperature the water heater can sustain 
safely, which is important for consumer purchase decisions. UEF 
decreases with increased tank temperature; therefore, the water heater 
is expected to perform at least as well as a high-temperature rating 
evaluated at the highest tank temperature set point, all other 
environmental conditions the same. Should additional information become 
available regarding the set point temperatures of consumer electric 
resistance storage water heaters in the field, DOE may consider it in a 
future test procedure rulemaking.
c. Very Small and Large Electric Storage Water Heaters
    In response to the July 2023 NOPR, some commenters stated that very 
small electric storage water heaters (i.e., products with less than 20 
gallons of rated storage volume) should not have to test to the high-
temperature test method because these products are too small to 
reasonably substitute for larger heat pump water heaters, so it may be 
unlikely that these products are set to a high tank set point 
temperature.
    Rheem suggested that the high-temperature test should be narrowly 
applied only to those electric storage water heaters which have 
potential to introduce a circumvention risk for heat pump water heater 
standards. In its comments, Rheem indicated that these products would 
be tabletop and electric storage water heaters with rated storage 
volumes greater than or equal to 20 gallons and less than or equal to 
35 gallons. Rheem recommended that high-temperature testing should not 
apply to all other electric water heaters with storage volume. (Rheem, 
No. 1177 at p. 2) In its analysis, Rheem determined that a 19-gallon 
very small electric storage water heater would need to store water at 
180 [deg]F to achieve an FHR of approximately 51 gallons, which is much 
higher than is typically observed in consumer water heaters. On this 
basis, Rheem stated that very small electric storage water heaters 
cannot match the delivery capacities of 20-55 gallon electric storage 
water heaters, which would otherwise require heat pump technology. 
(Rheem, No. 1177 at pp. 2-3)
    For electric resistance storage water heaters with rated storage 
volumes less than 20 gallons, AHRI recommended that high-temperature 
testing not be required because these units are unlikely to get into 
medium draw patterns at higher test temperatures. (AHRI, No. 1167 at p. 
6)
    A.O. Smith commented that, because small electric storage water 
heaters are the most likely to be operated at a higher temperature with 
a mixing valve to match the performance of larger water heaters, the 
high-temperature test method should be limited to small electric 
storage water heaters only. From its own testing of a 17-gallon very 
small electric storage water heater, A.O. Smith determined that 
increasing the set point from 125 [deg]F to 150 [deg]F resulted in a 
43-percent increase in effective storage volume, but only a 4-percent 
increase in FHR, and thus A.O. Smith concluded that very small electric 
storage water heaters cannot match the performance of larger water 
heaters, even when operating at their highest set point temperatures. 
A.O. Smith recommended that DOE specify the high-temperature test only 
applies to 20-35 gallon products in order to maintain 
representativeness while reducing manufacturer testing burden. A.O. 
Smith commented that this would still ``close the loophole'' for heat 
pump water heater circumvention. (A.O. Smith, No. 1182 at pp. 6-7) 
Providing this information, A.O. Smith recommended that electric 
resistance storage water heaters of less than 20 gallons or greater 
than 55 gallons should be exempt from the high-temperature test method. 
(A.O. Smith, No. 1182 at p. 7)
    To evaluate a potential exemption, DOE reviewed test data it had 
collected from very small electric storage water heaters in support of 
the proposed standards. These products, ranging in rated storage volume 
between 1.8 gallons and 19.9 gallons, all had delivery capacities in 
the very small or low draw patterns. Per its calculations, DOE also 
came to the same conclusion as commenters: no model would be capable of 
achieving an FHR high enough to place the water heater in the medium 
draw pattern at the highest tank temperature set point.
    Based on DOE's data and information presented by commenters, DOE 
agrees that products with rated storage volumes of less than 20 gallons 
would not likely be set to higher temperatures to boost household 
delivery capacity as a substitute for a larger water heater. Therefore, 
DOE is exempting all very small electric storage water heaters from 
having to test to the high-temperature test method to demonstrate 
compliance with new UEF-based standards.
    In addition to the previous suggestions provided by manufacturers, 
DOE received comments from NYSERDA and the CA IOUs suggesting that the 
high-temperature test method does not serve a purpose for larger 
electric resistance storage water heaters. NYSERDA stated that the 
high-temperature test method should not apply to larger-volume electric 
resistance storage water heaters that are already subject to heat pump-
level standards. (NYSERDA, No. 1192 at p. 6) NYSERDA stated that 
exempting electric storage water heaters larger than 55 gallons of 
rated storage volume from the high-temperature test method (or 
potentially capping the effective storage volume) would reduce test 
burden and allow manufacturers to maintain the status quo for larger 
electric resistance storage water heaters. (NYSERDA, No. 1192 at p. 6) 
The CA IOUs suggested that DOE amend the calculations for effective 
storage volume such that products with rated storage volumes less than 
or equal to 120 gallons would be capped at an effective storage volume 
of 120 gallons. (CA IOUs, No. 1175 at pp. 3-4)
    DOE agrees with NYSERDA and the CA IOUs that for products above a 
certain volume threshold, it is unlikely that testing according to the 
high-temperature method would provide more representative ratings. 
Specifically, the currently applicable standards for electric storage 
water heaters greater than 55 gallons of rated storage volume and less 
than or equal to 120 gallons of rated storage volume correspond to 
products with heat pump technology, such that all of these products on 
the market today are heat pump water heaters. (See 10 CFR 430.32(d)). 
Heat pump water heaters, discussed further in section V.D.1.d of this 
document, would already be exempt from the high-temperature test

[[Page 37931]]

method, as it is unlikely to be more representative for these products. 
Therefore, it is logical to exempt products that are 55-120 gallons of 
rated storage volume from the high-temperature test method, as this 
would be synonymous with the heat pump water heater exemption. Next, 
while DOE has not observed consumer electric storage water heaters on 
the market beyond 120 gallons of rated storage volume, it is unlikely 
that such very large products would rely on high-temperature operation 
to provide consumers with additional capacity: these products already 
contain rated storage volumes that are greater than those of products 
that have to comply with heat pump-level standards, such that the 
elevated temperature is not necessary to provide as much capacity as a 
heat pump water heater. Because of this, DOE has concluded that it is 
reasonable to exempt any electric storage water heater greater than 55 
gallons of rated storage volume from the high-temperature test method.
    This exemption for large electric storage water heaters 
additionally prevents potential backsliding from the standards of 55-
120 gallon products, a concern brought up by multiple stakeholders and 
discussed in section IV.A.1.e of this document, because the rated 
storage volume and effective storage volume would thus be equal for any 
model greater than 55 gallons. An electric storage water heater between 
55 and 120 gallons of rated storage volume would be required to 
demonstrate compliance with standards in accordance with the normal 
temperature test method, meaning that it cannot use the high 
temperature test method to increase its effective storage volume beyond 
120 gallons and become subject to less-stringent standards.
d. Optional Representations for Heat Pump Water Heaters
    In the July 2023 NOPR, DOE proposed that high-temperature testing 
would not apply to products that meet the definition of ``heat pump-
type'' water heater at 10 CFR 430.2. 88 FR 49058, 49166.
    CEC stated their appreciation of DOE's recognition for the 
significant non-efficiency grid benefit potential provided by 
maximizing the thermal storage of heat pump water heaters through the 
use of higher set point temperatures and thermostatic mixing valves. 
(CEC, No. 1173 at p. 12)
    Rheem supported allowing optional high-temperature representations 
for certain heat pump water heaters because high-temperature operation 
might become more representative of heat pump water heater 
installations for three main reasons: (1) the increased need for 
demand-response water heaters that can perform advanced load-up and 
high-temperature energy storage, (2) the longer recovery time for heat 
pumps can be offset by storing water at a higher temperature to 
increase the amount of hot water immediately available, and (3) because 
a heat pump increases the size of the water heater, a comparable FHR 
can require elevated storage temperature. Rheem suggested that high-
temperature operation for heat pump water heaters could cause even 
units with high UEF ratings to perform worse in the field. (Rheem, No. 
1177 at pp. 2-4)
    As noted in section V.D.1 of this document, if a water heater in 
its default mode of operation \200\ has an internal tank temperature 
that significantly exceeds the delivery set point temperature, the 
calculation of effective storage volume captures this effect even 
without the high-temperature test method. (See section 6.3.1.1 of 
appendix E.) The FHR test would be carried out in this default mode and 
capture the increased delivery capacity. The 24-hour simulated-use test 
would be carried out in this default mode and would capture the 
increased standby losses from the higher-temperature operation. 
Therefore, if any heat pump water heater is designed to boost the tank 
temperature and incorporate a mixing valve as part of its normal 
operation, the effective storage volume, FHR, and UEF values resulting 
from the appendix E test procedure as written would be representative 
of this type of operation in the field.
---------------------------------------------------------------------------

    \200\ Section 5.1.1 of appendix E outlines the determination of 
the operational mode for testing heat pump water heaters, which 
shall be the default mode unless otherwise specified.
---------------------------------------------------------------------------

    DOE did not receive any other comments requesting that the high-
temperature test method be made optional for voluntary representations 
of heat pump water heaters; however, DOE understands there is potential 
need to demonstrate storage and delivery capacity for heat pump water 
heaters representative of high-temperature operation that is not the 
default mode. Heat pump water heaters, unlike traditional electric 
resistance storage water heaters, can offer more modes to control the 
way the compressor and backup elements behave as a natural outcome of 
having more than one way to heat the water, and increasing storage tank 
temperature could be one potential way to increase delivery capacity 
when the compressor operates alone (i.e., offers a slower recovery 
speed). In the June 2023 TP Final Rule, DOE adopted optional metrics 
for voluntary representations of heat pump water heaters to demonstrate 
performance in a variety of different environmental conditions because 
this information, DOE surmised, would be relevant for consumer 
information, and manufacturers already tested products to these 
alternate conditions. 88 FR 40406, 40437-40438. Similarly, DOE has 
determined that optional high-temperature representations would be 
relevant for consumer information as the market transitions towards 
this technology.
    First, as discussed earlier, certain consumers using certain water 
heater configurations may desire higher set point temperatures, in 
which case the high-temperature test method could provide 
representative performance results. Second, as indicated by Rheem, 
future heat pump water heater control strategies could use variation of 
the storage tank temperature to compensate for slower compressor 
recovery periods when backup elements are either absent or disabled. 
A.O. Smith commented that consumers may be led to ``upsize'' when 
transitioning to a heat pump water heater (see section IV.C.1.b of this 
document for further discussion of this comment); however, as Rheem 
suggested, high-temperature performance data could enable consumers to 
purchase smaller, less expensive heat pump water heaters if the high-
temperature performance data demonstrate equivalent performance to a 
larger product.
    Unlike the mandatory requirement for electric resistance storage 
water heaters, the high-temperature test is optional for heat pump 
water heaters. This is because DOE expects the representativeness of 
this test method to depend on the designs of heat pump water heaters 
that emerge within the compliance period of this final rule. At this 
time, heat pump water heaters comprise a relatively small portion of 
the market; therefore, consumer preferences and usage are not yet as 
well understood (whereas, for electric resistance storage water 
heaters, several commenters indicated that the high-temperature test 
method would be representative of field applications). Should higher 
tank temperatures become more prevalent in field use as a result of a 
technology transition, DOE may revisit the implementation of the high-
temperature test method in a future test procedure rulemaking.
e. Temporary Mode
    Some electric resistance water heaters could offer high-temperature 
modes that

[[Page 37932]]

allow for set points 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 set point to a more typical temperature after a certain period of 
time has elapsed. Because these temporary modes cannot be used 
permanently, in the July 2023 NOPR DOE tentatively determined that 
units capable of storing water at a set point 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. 88 FR 49058, 49165. 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. Thus, DOE proposed 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 expected 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 
concluded it is representative to test such water heaters in the high-
temperature modes and is proposing to require such testing. Id.
    GEA commented that DOE's 120-hour limit without user intervention 
for extra demand is an appropriate approach for maintaining consumer 
utility and the energy-saving benefits of such features. (GEA, No. 1203 
at pp. 1-2)
    AHRI requested that DOE provide additional information on what 
meets the definition of a ``consumer-initiated'' high-temperature mode, 
which, if lasting less than 120 hours, would deem the product exempt 
from the high-temperature test method. AHRI also inquired as to the 
type of interaction by the user that is necessary to satisfy the 
requirement and whether the user can create a schedule. AHRI raised a 
concern that if products fail to meet the specific requirement for the 
temporary mode exemption, products tested to the high-temperature test 
method would not be able to comply with standards. (AHRI, No. 1167 at 
p. 4) BWC also asked for DOE to further clarify what a ``permanent mode 
or setting'' meant for the high-temperature test exemption. (BWC, No. 
1164 at pp. 7-8)
    Stanonik stated that the proposed addition of high-temperature 
testing provisions is confusing, and added that the provisions may be 
read to apply to most electric storage water heaters despite the fact 
that DOE explains the provisions are only meant to apply to a subset of 
them. Stanonik requested DOE clarify if the act of changing the 
thermostat on a consumer water heater would be considered an ``external 
consumer intervention'' that would then exclude the water heater from 
high-temperature testing. (Stanonik, No. 1197 at p. 1)
    Rheem stated that it was generally supportive of the outlined 
exemptions from the high-temperature test, except for the temporary 
setting exemption. Although Rheem had suggested that DOE investigate 
temporary modes of operation in the test procedure rulemaking, Rheem 
indicated in its comments to the July 2023 NOPR that such an exemption 
would not be necessary if the test method were clarified and the 
temperature criterion were raised from 135 [deg]F to 140 [deg]F. 
(Rheem, No. 1177 at pp. 6-7)
    In response to these requests from stakeholders, DOE is clarifying 
what would constitute consumer intervention for the purpose of the 
high-temperature test exemption. As discussed in section V.D.1.b of 
this document, a high-temperature mode would be one in which the water 
heater can achieve a Tmax,1 greater than 135 [deg]F during 
the 24-hour simulated-use test. If the water heater is set to such a 
mode, and the only time when it can achieve a Tmax,1 greater 
than 135 [deg]F is in the period of time that lasts 120 hours or less 
after the mode or setting is engaged by the user, then this would 
constitute a temporary high-temperature mode. To be exempt from the 
high-temperature test method, such a temporary high-temperature mode 
can only be activated via user intervention with the water heater. Once 
the temporary period of high-temperature operation has elapsed, the 
water heater must return to a lower tank temperature that would result 
in a Tmax,1 less than or equal to 135 [deg]F. If the user 
wishes to extend the period beyond 120 hours, they must reactivate the 
mode manually.
    The purpose of this exemption is to allow products to increase 
capacity when there are limited times of high demand. Therefore, the 
consumer would have to manually activate the mode (e.g., pushing a 
physical or digital button) if the high-temperature mode is required. 
If, instead, a product adheres to a regular schedule of high-
temperature operation, a product would operate in a manner that 
demonstrates a consistent need for additional capacity, and in such a 
case the high-temperature test method would be more representative of 
the average daily use cycle of the product. For this reason, a 
scheduled setting would not be exempt from the high-temperature test 
method. For the normal-temperature test to remain representative of the 
ratings of the product, the water heater must permanently return to a 
mode in which the Tmax,1 will not exceed 135 [deg]F at any 
time after the temporary high-temperature operation has elapsed, and 
the only way in which the water heater would return to an elevated 
temperature is if the consumer interacts with the product manually 
again.
    In response to Stanonik's question, the act of manually changing 
the set point temperature to achieve a mode in which the water heater 
can attain a Tmax,1 beyond 135 [deg]F is generally addressed 
in section V.D.1.b of this document. If the consumer can set the water 
heater to permanently heat and store water beyond 135 [deg]F, then the 
water heater is not exempt from the high-temperature test. As outlined 
in section V.D.1.g of this document, such a model would not pass the 
second criterion for exemption.
f. Demand-Response Water Heaters
    In the July 2023 NOPR, DOE proposed 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 reasoned that the 
additional energy consumption from high-temperature water storage in 
demand-response water heaters is compensated for by periods of water 
heater inactivity (i.e., a curtailment period) and, thus, demand-
response water heaters do not engage in high-

[[Page 37933]]

temperature water storage in order to directly increase capacity over a 
representative average use cycle of 24 hours. 88 FR 49058, 49166.
    AHRI stated that it appreciated the exemptions from the high-
temperature test method, especially regarding demand-response water 
heaters; however, AHRI asserted the demand-response exemption was not 
clearly defined. AHRI requested DOE clarify the extent of this 
exemption for manufacturers. (AHRI, No. 1167 at p. 2) AHRI commented 
that setting an arbitrary maximum temperature for electric storage 
water heaters may create potential issues for consumers in 
jurisdictions with demand-response requirements. Specifically, AHRI 
stated that load-up events for demand-response water heaters allow 
products to store energy, and limiting the temperature of the water 
heater will limit its load-up capability. AHRI requested that DOE 
consider increasing the temperature criterion for the high-temperature 
test exemptions in order to accommodate this function of demand-
response water heaters. (AHRI, No. 1167 at p. 3)
    BWC expressed concerns with how DOE's high-temperature test method 
might impact demand-response electric resistance water heaters, 
suggesting that there could still be complications for these products 
even with the exemption from the high-temperature test method. BWC 
stated that the purpose of demand-response controls, as required in 
many states, is to heat the unit to a higher temperature during off-
peak hours to store energy during times of peak electric grid demand, 
and that these controls can be activated by either the utility or the 
consumer themselves. BWC commented that water heaters would be 
incapable of storing water at or above 135 [deg]F if the proposal were 
finalized, which would limit the load-shifting capabilities of demand-
response water heaters. (BWC, No. 1164 at p. 8)
    In response to commenters' concern about demand-response water 
heaters being limited to 135 [deg]F, DOE is clarifying the meaning of 
its proposed exemption to the high-temperature test method. As noted 
previously, DOE proposed that electric storage water heaters capable of 
heating and storing water over 135 [deg]F only in response to utility 
demand response signals would not be subject to high-temperature 
testing. This exemption was proposed so that water heaters intended for 
use in demand-response programs would not have to limit their 
temperature, provided that the ability to raise the temperature is 
initiated only as part of the water heater's use in a demand-response 
program. (This does not, however, preclude a demand-response water 
heater from also having a manual temporary high-heat mode as described 
in the previous section.)
    In this final rule, DOE is adopting an exemption to the high-
temperature test method that will allow demand-response programs to 
elevate the temperature of the water heater to any temperature that the 
unit is capable of achieving, so long as the unit can only achieve 
those temperatures as a result of the demand-response operation and not 
as a result of the user increasing the set point temperature. For 
example, a product with its maximum user-operable set point can store 
water at or below 135 [deg]F during normal operation, but in response 
to utility signals requesting a load-up, the product can increase the 
temperature to 160 [deg]F (as an example) would be exempt from the 
high-temperature test method because the user cannot set the water 
heater to continuously operate above 135 [deg]F. Whereas continuous 
operation above 135 [deg]F would increase the effective storage volume 
and FHR of the water heater, a load-up event that prompts the water 
heater to increase the temperature above this point does not. The load-
up event only temporarily boosts the temperature so that the water 
heater can rely on stored energy throughout peak grid demand periods 
instead of relying on electricity from the grid; therefore, over the 
course of a representative average-use cycle (one day), the water 
heater does not provide extra capacity compared to when it is set to a 
lower temperature and allowed to recover the tank throughout the day.
    Additionally, AHRI questioned whether grid-enabled water heaters 
are also exempt from the high-temperature testing method. (AHRI, No. 
1167 at p. 3) BWC also requested clarification on whether the high-
temperature test method would apply to grid-enabled water heaters, as 
this was not mentioned in either the June 2023 TP Final Rule or the 
July 2023 NOPR. (BWC, No. 1164 at pp. 8-9) Rheem argued that, because 
grid-enabled water heaters are intended for demand-response, they are 
not a direct replacement for heat pump water heaters to a great extent, 
and that the high-temperature test method need not apply to grid-
enabled water heaters. (Rheem, No. 1177 at p. 3)
    Grid-enabled water heaters, discussed in section IV.A.1.e, are 
defined as having rated storage volumes greater than 75 gallons (see 10 
CFR 430.2). In section V.D.1.c of this final rule, DOE concluded that 
products with rated storage volumes greater than 55 gallons would be 
exempt from the high-temperature test method. As a result, all grid-
enabled water heaters are exempt from the high-temperature test method. 
Grid-enabled water heaters are a specific subset of electric storage 
water heater products, which must be enrolled with a grid utility 
program and are designed for the purpose of demand-response control. As 
such, DOE expects that these products achieve higher storage 
temperatures as a result of utility signals and not as a result of a 
consumer's need for additional hot water. Therefore, DOE has concluded 
that it is representative for grid-enabled water heaters to test to a 
normal set point temperature and not the high-temperature test method.
g. Summary of the High-Temperature Test Method Applicability
    As a result of the considerations discussed in the previous 
sections, DOE is establishing that the high-temperature test method 
must be conducted for all electric storage water heaters, except for 
those meeting the following exemptions.
    The first exemption is for products that are not capable of heating 
the stored water beyond a Tmax,1 temperature of 135 [deg]F. 
If the product has a Tmax,1 less than or equal to 135 [deg]F 
when tested in the user-operable mode that results in its highest set 
point, the product is exempt. This temperature criterion allows the 
water heater to maintain its utility of providing hotter water for 
certain consumer needs without increasing the temperature so much that 
the water heater can be used as a direct substitute for a larger water 
heater that must comply with more stringent standards. Beyond this 
temperature, the high-temperature test method is more representative of 
the product's use in the field.
    The second exemption is for heat pump water heaters. As discussed 
previously, heat pump water heaters are unlikely to be used to a 
significant extent at high temperatures. However, in the event that a 
heat pump water heater is designed for high-temperature operation, the 
heat pump water heaters are allowed to use the high-temperature test 
method optionally for voluntary representations, but normal set point 
operation (section 5.1.1 of appendix E) is the mode that must be used 
to demonstrate compliance with standards.
    The third exemption is for demand-response water heaters, 
specifically those products which can only attain temperatures beyond 
135 [deg]F when requested to do so by a utility signal. If a product 
does not allow the consumer to operate it in a manner that would result 
in a Tmax,1 beyond 135 [deg]F but does allow the grid to 
increase the tank temperature above this point, it remains

[[Page 37934]]

exempt from the high-temperature test method.
    The fourth exemption is for water heaters that allow the user to 
raise the temperature beyond 135 [deg]F, but only for a maximum of 120 
hours before automatically resetting to a temperature setting that 
results in Tmax,1 at or below 135 [deg]F. This allows water 
heaters to provide flexible-capacity modes for times when consumers may 
experience increased occupancy in the residence and thus a greater 
demand for hot water. The water heater must return to a mode that would 
result in a Tmax,1 less than or equal to 135 [deg]F after 
the 120-hour period elapses unless the user activates the boost mode 
again.
    The fifth exemption is for water heaters of in-size categories 
where high-temperature operation is not expected to be representative 
of the product's function over an average daily use cycle. Very small 
electric storage water heaters (those with rated storage volumes less 
than 20 gallons) and large electric storage water heaters (those with 
rated storage volumes greater than 55 gallons) are not expected to use 
higher temperatures to boost capacity in order to be direct substitutes 
for products which have significantly more stringent standards.
    This final rule adopts these five exemptions for section 5.1.2 of 
appendix E and 10 CFR 429.17.
2. Circulating Water Heaters
a. Separate Storage Tank Requirements
    In response to the December 2023 SNOPR, NYSERDA encouraged DOE to 
review the test procedure to ensure that defining circulating water 
heaters as storage-type water heaters is consistent with the test 
method developed for these products. (NYSERDA, No. 1406 at p. 2)
    The test method for circulating water heaters, as established by 
the June 2023 TP Final Rule, requires these products to be connected to 
a separate storage tank to serve as the volume of hot water that the 
circulating water heater requires for its function. See section 4.10 of 
the appendix E test procedure. As such, when a circulating water heater 
is tested per the appendix E test method, the test method will account 
for the stored volume of hot water and the standby losses that occur 
from it. This is analogous to how other traditional storage-type water 
heaters are tested.
    When considering the potential impact of the proposed standards for 
electric storage water heaters on the availability of products to pair 
with heat pump circulating water heaters, DOE tentatively decided in 
the July 2023 NOPR that it would be more representative to pair such a 
product with an electric resistance storage water heater, surmising 
that 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. 88 FR 49058, 49167. Thus, in the July 2023 NOPR, DOE 
proposed to amend the separate storage tank requirement for a heat pump 
circulating water heater to reflect an electric resistance storage 
water heater that would be compliant with the proposed standards. 
Specifically, this proposed requirement was to pair a heat pump 
circulating water heater with a 30 gallon  5 gallon 
electric resistance storage water heater in the low draw pattern. Id.
    In response to the July 2023 NOPR, some commenters indicated that 
heat pump circulating water heaters would be paired with a variety of 
tank sizes, meaning it would be impractical to base a rating for these 
products on just one tank pairing. Additionally, some commenters 
recommended alternative separate storage tank requirements to those 
proposed, or requested clarification.
    A.O. Smith noted that gas-fired circulating water heaters present 
on the market today are only used in commercial applications, and the 
UFHWST tank pairing for these products is not common in residential 
applications, as it would result in a more expensive installation 
compared to a gas-fired storage water heater. (A.O. Smith, No. 1182 at 
p. 13)
    BWC stated that it does not believe heat pump circulating water 
heaters should be coupled with 30 gallon  5 gallons 
electric storage water heaters in the appendix E test method for these 
products because this would not be realistic or representative of most 
real-world installations, which will typically rely on much larger 
tanks due to the slower recovery rate of a heat pump. BWC added that 
heat pump circulating water heaters are designed to meet a variety of 
unique residential applications in the field, which include different 
tank sizes and setups to provide adequate hot water, each of which 
would produce different efficiency ratings when tested; if forced to 
test to just one tank size, BWC stated that it would be compelled to 
cite to consumers an efficiency rating that is likely inflated and 
inaccurate compared to what the consumer will see in practice. BWC 
added further that a UFHWST, like that which is used for other types of 
circulating water heaters, would be a more representative pairing for 
heat pump circulating water heaters. (BWC, No. 1164 at pp. 12-13) Rheem 
suggested that heat pump circulating water heaters be certified with an 
UFHWST similar to other types of circulating water heaters because heat 
pump circulating water heaters may be developed to not rely on the use 
of backup electric resistance elements in an electric storage water 
heater tank. (Rheem, No. 1177 at pp. 14-15)
    In section IV.A.1.a of this document, DOE discussed its decision to 
consider circulating water heaters as storage-type water heaters. 
Therefore, circulating electric heat pump water heaters would be 
classified as electric storage water heaters and subject to the 
applicable electric storage water heater standards. DOE does not intend 
to stifle innovation in or misinform consumers on the efficiency and 
performance characteristics of heat pump circulating water heaters, 
which could be used by consumers in lieu of traditional heat pump water 
heaters. In the test procedure rulemaking, DOE received an abundance of 
feedback indicating that these products are most likely to be paired 
with electric resistance storage water heaters, which was the basis for 
the proposed tank pairing in the July 2023 NOPR. Notwithstanding the 
recommendations from BWC and Rheem, there remains uncertainty regarding 
the sizes of UFHWSTs that could be paired with a heat pump circulating 
water heater should these products not be used with electric resistance 
storage water heaters. Products DOE has found on the market have 
demonstrated positive results from case studies while being paired up 
with nominal 40-gallon electric resistance storage water heaters,\201\ 
so it is expected that the products available today would remain 
compatible with slightly smaller tanks as well. Therefore, in this 
final rule, DOE concludes that an electric resistance storage water 
heater that is 30 gallons  5 gallons and in the low draw 
pattern is still a representative pairing based on feedback received in 
the test procedure rulemaking.
---------------------------------------------------------------------------

    \201\ A case study published by Nyle Water Heating Systems 
demonstrates the use of a circulating heat pump water heater with a 
nominal 40-gallon electric storage water heater. See online at: 
www.nyle.com/wp-content/uploads/2021/09/Case-Study-3.2.pdf (Last 
accessed: Jan. 5, 2024).
---------------------------------------------------------------------------

    In response to the December 2023 SNOPR, BWC commented that 
manufacturers will need to be able to test gas-fired circulating water 
heaters with a greater range of unfired hot water storage tank volumes 
than that which is specified in the June 2023 TP Final Rule. (BWC, No. 
1413 at p. 2)

[[Page 37935]]

    However, without consumer gas-fired circulating water heaters on 
the market, there is insufficient information (other than the feedback 
received during the test procedure rulemaking) to make a determination 
to amend the separate storage tank pairing for these products. The test 
method to pair gas-fired circulating water heaters with 80- to 120-
gallon unfired hot water storage tanks was developed after careful 
consideration of numerous comments provided in that rulemaking. While 
finalizing the amendment as proposed, DOE will continue to assess the 
representativeness of the separate storage tank provisions in the 
appendix E test procedure and address these concerns in a future test 
procedure rulemaking if necessary.
    Rheem stated its understanding that circulating water heaters would 
be tested with a manufacturer-specified storage tank, and that the 
storage tanks described in section 4.10 of appendix E would only be 
used if there was no manufacturer-specified storage tank. (Rheem, No. 
1408 at p. 2) AHRI and A.O. Smith requested that DOE clarify whether a 
manufacturer would be able to make efficiency representations of 
circulating water heaters that are designed and specified (or shipped) 
for use with a storage tank that does not fall into the volume ranges 
outlined in the test procedure and enforcement provisions. (A.O. Smith, 
No. 1182 at p. 7; AHRI, No. 1167 at pp. 13-14)
    The Department intends for the separate storage tank requirements 
in section 4.10 to apply to circulating water heaters, which are 
storage-type water heaters that are not sold with a tank. DOE 
understands that there may be some confusion based on the wording of 
section 1.19 of appendix E, which reads that a ``water heater requiring 
a storage tank'' means a water heater without a storage tank specified 
or supplied by the manufacturer that cannot meet the requirements of 
sections 2 and 5 of appendix E without the use of a storage water 
heater or unfired hot water storage tank. The current wording of 
section 1.19 in appendix E inadvertently conflates circulating water 
heaters with split-system water heaters--the distinctions between these 
two are discussed in section IV.A.1.f.i of this document. As such, DOE 
is making a minor amendment to section 1.19 of appendix E to resolve 
industry confusion around these distinctions after determining that it 
is clearer to define a ``water heater requiring a storage tank'' as a 
water heater without a storage tank supplied by the manufacturer that 
cannot meet the requirements of sections 2 and 5 of appendix E without 
the use of a storage water heater or unfired hot water storage tank. 
This edit removes the possibility that a water heater could have a 
manufacturer-specified tank pairing but would have to be tested with a 
different separate storage tank. Simultaneously DOE is clarifying in 
section 4.10 of appendix E that those setup provisions apply to water 
heaters requiring a storage tank--a term that is essentially synonymous 
with ``circulating water heater.''
    In response to the questions from AHRI and A.O. Smith, 
representations of circulating water heaters must be made in accordance 
with the separate storage tank requirements in the appendix E test 
procedure. The compliance of the circulating water heater with the 
appropriate storage water heater standards would be determined based on 
the storage volume of the tank selected, which in turn determines the 
effective storage volume of the circulating water heater. For all types 
of circulating water heaters, should a manufacturer desire to report 
its performance to multiple tank sizes, each tank size would constitute 
a separate basic model.
    Reporting requirements are not being established in this rulemaking 
addressing energy conservation standards for consumer water heaters, 
however, and DOE will propose these requirements in a separate 
rulemaking.
b. Product-Specific Enforcement Provisions
    In the July 2023 NOPR, DOE proposed a series of steps it would take 
to ensure that the UFHWST used in assessment testing is as close as 
possible to the model that was used to determine the circulating water 
heater's rating. As stated earlier, reporting requirements are not 
being addressed in this rulemaking, but will be considered separately. 
88 FR 49058, 49167. The intent of DOE's proposal was to create a 
procedure that would default to using the same tank that the 
circulating water heater manufacturer used, but in the extenuating 
circumstance wherein that tank is unavailable to DOE, the model could 
still be tested.
    A.O. Smith recommended that DOE bolster the enforcement provisions 
and definitions outlining what would constitute a circulating water 
heater to prevent the emergence of electric resistance circulating 
water heater configurations. (A.O. Smith, No. 1182 at pp. 12-13) A.O. 
Smith also asked DOE to clarify certification requirements for 
circulating water heaters. (A.O. Smith, No. 1182 at p. 7) BWC stated 
that several provisions leave open the possibility that DOE could 
conduct enforcement testing with a significantly different UFHWST, 
including the possibility of testing with a different manufacturer's 
tank. BWC added that this could lead to unfair results, and that 
instead DOE should allow manufacturers to provide DOE with the UFHWST 
that is to be paired with the circulating water heater. (BWC, No. 1164 
at pp. 13-14) BWC requested that DOE reconsider its proposed product-
specific enforcement provisions for circulating water heaters, which 
include the steps DOE would take to test with an UFHWST as similar as 
possible to the one used by the manufacturer to rate the circulating 
water heater, so that the manufacturer could provide the UFHWST to DOE 
for testing. (BWC, No. 1164 at pp. 13-14) Rheem requested that DOE 
clarify whether the effective storage volume is a more appropriate 
metric to use than rated storage volume in the enforcement provisions 
proposed. Rheem supported the enforcement provisions proposed for 
testing these products but suggested that DOE test at the lowest 
storage volume available within the 80-120 gallon range for UFHWSTs. 
(Rheem, No. 1177 at pp. 14-15)
    In response to the request from BWC, DOE does not directly source 
the tank from manufacturers as it would limit the ability for 
independent assessment testing given that manufacturers are not always 
notified when assessment testing occurs.
    In response to Rheem's question about rewriting provisions to use 
the effective storage volume metric, it is unclear where a change would 
apply, because the provisions outline the steps with regard to the 
characteristics of the UFHWST, and UFHWSTs have a certified storage 
volume rather than an effective storage volume.
    As such, DOE is finalizing the product-specific enforcement 
provisions for circulating water heaters as proposed in the July 2023 
NOPR. DOE may re-evaluate the product-specific enforcement provisions 
for these products in a separate rulemaking.
3. Water Heaters Less Than 2 Gallons
    The July 2023 NOPR proposed 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 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

[[Page 37936]]

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 the July 2023 NOPR, DOE proposed 
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.
    No comments were received in response to this proposal. Therefore, 
DOE is adopting this update to appendix E as proposed in the July 2023 
NOPR.
4. Other Topics
    In the June 2023 TP Final Rule, DOE adopted optional provisions at 
section 2.8 of appendix E to allow manufacturers to make voluntary 
representations of heat pump water heater performance in a variety of 
alternative conditions that could be useful for consumers installing 
these products in different locations. These alternative conditions 
would not be used to determine compliance with the UEF standards at 10 
CFR 430.32(d) but were provided to permit representations at the NEEA 
Advanced Water Heating Specification version 8.0 conditions.\202\ 88 FR 
40406, 40476.
---------------------------------------------------------------------------

    \202\ Representations of rated values for consumer water heaters 
must be made in accordance with the provisions of the Federal test 
procedure, appendix E. (42 U.S.C. 6293(c)).
---------------------------------------------------------------------------

    Rheem requested that DOE address certification and enforcement 
provisions for heat pump water heaters being tested to the optional 
test conditions in section 2.8 of appendix E. (Rheem, No. 1177 at p. 7)
    DOE reiterates that optional conditions cannot be used to 
demonstrate compliance with standards. DOE is not adopting 
certification and enforcement provisions for optional test conditions 
in this final rule but may consider this in a future rulemaking 
addressing these topics.

VI. Procedural Issues and Regulatory Review

A. Review Under Executive Orders 12866, 13563, and 14094

    Executive Order (``E.O.'') 12866, ``Regulatory Planning and 
Review,'' 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 this 
preamble, this 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 final 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 final 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 
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'') 
and a final regulatory flexibility analysis (``FRFA'') 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 FRFA 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

[[Page 37937]]

employees or fewer for an entity to be considered as a small business 
for this category.
1. Need for, and Objectives of, Rule
    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 \203\ 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))
---------------------------------------------------------------------------

    \203\ 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. Significant Issues Raised by Public Comments in Response to the IRFA
    In response to the July 2023 NOPR, the Gas Association Commenters 
submitted comments noting that DOE identified only two small 
businesses, neither of which produce gas-fired water heaters. As a 
result, the Gas Association Commenters stated that DOE has no data on 
small businesses that produce gas-fired water heaters relative to 
redesign costs, product availability, or whether the proposed 
efficiency levels could cause small businesses to exit the market. (Gas 
Association Commenters No. 1181, pp. 38-39)
    NPGA, APGA, AGA, and Rinnai stated that as the two small businesses 
DOE identified in the July 2023 NOPR analysis do not produce gas-fired 
water heaters, DOE cannot know what the effect on small businesses that 
manufacture gas-fired water heaters could be as DOE has no data on 
their redesign costs, product availability, or whether the standards 
proposed in the July 2023 NOPR would force these manufacturers to leave 
the market. Therefore, NPGA, APGA, AGA, and Rinnai asserted that the 
July 2023 NOPR fails to comply with Executive Order 13272, ``Proper 
Consideration of Small Entities in Agency Rulemaking,'' and must be 
addressed. (NPGA, APGA, AGA, and Rinnai, No. 441 at p. 5)
    For the IRFA conducted in support of the July 2023 NOPR, DOE 
identified one small domestic original equipment manufacturer (``OEM'') 
of oil-fired storage water heaters and one small domestic OEM of 
electric storage water heaters. For this FRFA, DOE refreshed its 
product database to include up-to-date information on the consumer 
water heater models marketed for the United States. Based on its 
comprehensive review of the market, DOE identified an additional small, 
domestic OEM of electric storage water heaters. Therefore, DOE 
maintains its finding from the IRFA that there are no small, domestic 
OEMs that manufacture gas-fired water heaters. As such, DOE does not 
expect that the standards adopted in this final rule would directly 
impact small businesses that manufacture gas-fired water heaters.
    BWC expressed concern about the extensive resources such an 
undertaking would divert from ongoing projects, as well as its 
potentially more severe impacts on smaller manufacturers, including 
component suppliers. (BWC, No. 1164 at p. 15) ASA stated that 
manufacturers and distributors, including small businesses, would be 
negatively affected by increased costs for both units and installation 
and that consumer choice would be restricted. ASA requested that DOE 
update data used to develop these standards. (ASA, No. 1160 at p. 1)
    DOE agrees that the impacts small manufacturers experience may 
differ compared to larger, more diversified manufacturers. DOE conducts 
a regulatory flexibility analysis to understand and assess the 
potential impacts to small domestic OEMs that produce consumer water 
heaters for the U.S. market in accordance with the procedures and 
policies published on February 19, 2003. 68 FR 7990. See section VI.B.3 
of this document for a discussion of potential impacts of amended 
standards on the three small businesses with U.S. manufacturing 
facilities identified.
3. Description and Estimated Number of Small Entities Affected
    For this FRFA, DOE refreshed its product database to use up-to-date 
information on the models available on the U.S. market and estimate the 
number of companies that could be small business manufacturers of 
products covered by this rulemaking. DOE's research involved reviewing 
its CCD,\204\ California Energy Commission's Modernized Appliance 
Efficiency Database System (``MAEDbS''),\205\ EPA's Energy Star Product 
Finder dataset,\206\ AHRI's Directory of Certified Product 
Performance,\207\ individual company websites, and market research 
tools (e.g., reports from D&B Hoovers) \208\ 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.
---------------------------------------------------------------------------

    \204\ U.S. Department of Energy's Compliance Certification 
Database is available at regulations.doe.gov/certification-data 
(last accessed May 16, 2023).
    \205\ California Energy Commission's Modernized Appliance 
Efficiency Database System is available at 
cacertappliances.energy.ca.gov/Pages/Search/AdvancedSearch.aspx 
(last accessed November 13, 2023).
    \206\ U.S. Environmental Protection Agency's ENERY STAR Product 
Finder dataset is available at www.energystar.gov/productfinder/ 
(last accessed November 13, 2023).
    \207\ AHRI's Directory of Certified Product Performance is 
available at www.ahridirectory.org/Search/SearchHome?ReturnUrl=%2f 
(last accessed May 16, 2023).
    \208\ The D&B Hoovers subscription login is available at 
app.dnbhoovers.com.
---------------------------------------------------------------------------

    DOE identified 22 OEMs of electric instantaneous, electric storage, 
gas-fired instantaneous, gas-fired storage, or oil-fired storage water 
heaters sold in the United States as part of its July 2023 NOPR 
analysis. In preparation for the final rule, DOE conducted additional 
research to ensure an up-to-date data on the consumer water heater 
market. After a further comprehensive review of the model listings, DOE 
concluded that three of the manufacturers previously identified do not 
manufacture consumer water heaters in-house (i.e., they do not own and 
operate manufacturing facilities that produce consumer water heaters). 
However, DOE determined there are three additional manufacturers not 
previously identified that manufacture consumer water heaters in-house. 
DOE also revised its OEM count estimate to exclude manufacturers of 
gas-fired instantaneous water heaters since this final rule does not 
cover gas-fired instantaneous water heaters. Therefore, excluding 
manufacturers that only offer gas-fired instantaneous water heaters, 
DOE identified 16 OEMs of consumer water heaters covered by this final 
rule. Of these 16 OEMs, DOE identified three small, domestic 
manufacturers affected by amended standards for gas-fired storage water 
heater, oil-fired storage water heater, or electric storage water 
heater products. The first small business is an OEM of oil-fired 
storage water heaters. The other two small businesses are OEMs of 
electric storage water heaters.

[[Page 37938]]

4. Description of Reporting, Recordkeeping, and Other Compliance 
Requirements
    The first small business is an OEM that certifies three models of 
oil-fired storage water heaters. One of the three models would meet the 
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 
its range of model offerings. DOE requested input on the potential 
impacts of standards on this manufacturer in the July 2023 NOPR, but 
did not receive any feedback. DOE, therefore, maintains its assumption 
from the IRFA that this manufacturer would not incur significant 
conversion costs as a result of this rulemaking.
    The second small business is an OEM that certifies eleven models of 
electric storage water heaters. The company offers two small electric 
storage water heaters, six 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 electric storage water heaters 
with effective storage volumes above 55 gallons. At the adopted level 
(TSL 2), DOE does not expect the two small electric water heater models 
would require notable redesign as standard levels would remain at the 
baseline efficiency level (i.e., EL 0) for small electric water 
heaters. None of the six electric storage water heaters (between 20 and 
55 gallons, excluding small electric storage water heaters) would meet 
the amended standard. However, one of the six electric storage water 
heaters (between 20 and 55 gallons, excluding small electric storage 
water heaters) is a heat pump model that would likely not require 
significant redesign to meet the amended standards. DOE expects the 
company would expand its heat pump offering rather than redesign the 
electric resistance products that do not meet the amended standard. The 
company offers three electric storage water heaters with effective 
storage volumes above 55 gallons. All three of these are heat pumps 
that do not meet the amended standard. After reviewing the three 
electric storage water heaters with effective storage volumes above 55 
gallons, DOE believes the three models could be updated to meet the 
amended standard. In total, the company would need to redesign up to 
nine models.
    DOE assumed the company would need to invest the equivalent of one 
year of its R&D resources to update its product lines to meet amended 
standards. Therefore, to derive this company's estimated product 
conversion costs, DOE scaled the annual industry R&D expenditures for 
electric storage water heaters in the GRIM by the company's estimated 
market share. DOE does not anticipate significant capital conversion 
costs, as the company offers a broad line of heat pump electric storage 
water heaters today. DOE estimates total conversion costs to be 
$250,000 for this small manufacturer. Based on market research tools, 
DOE estimated the company's annual revenue to be approximately $50 
million. Taking into account the 5-year conversion period, DOE expects 
conversion costs to be less than 1 percent of conversion period 
revenue.\209\
---------------------------------------------------------------------------

    \209\ DOE calculated total conversion costs as a percent of 
revenue over the 5-year conversion period using the following 
calculation: ($0.25 million)/(5 years x $50 million).
---------------------------------------------------------------------------

    The third small business is an OEM that produces two models of 
circulating water heaters, which are not currently required to comply 
with a UEF standard. DOE expects that both of these models would 
qualify as small electric storage water heaters, and thus would likely 
be subject to new and amended UEF standards. At the adopted level (TSL 
2), the standard required for small electric storage water heaters 
would remain at the baseline efficiency level. DOE notes that both of 
the models identified utilize heat pump technology. Therefore, DOE 
assumes these models would not need to be redesigned to comply with new 
and amended UEF standards. However, this small manufacturer would need 
to certify these models at the time of compliance with new and amended 
standards, incurring testing costs of $3,000 per basic model. 88 FR 
40406, 40467. Based on market research tools, DOE estimated the 
company's annual revenue to be approximately $7.7 million. Taking into 
account the 5-year conversion period, DOE expects conversion costs to 
be less than 1 percent of conversion period revenue.\210\
---------------------------------------------------------------------------

    \210\ DOE calculated total conversion costs as a percent of 
revenue over the 5-year conversion period using the following 
calculation: ($6,000)/(5 years x $7,700,000).
---------------------------------------------------------------------------

5. Significant Alternatives Considered and Steps Taken To Minimize 
Significant Economic Impacts on Small Entities
    The discussion in the previous section analyzes impacts on small 
businesses that would result from adopted standards, represented by TSL 
2. In reviewing alternatives to the adopted standards, 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 
98-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 adopt one of the other TSLs 
considered in the analysis, nor the other policy alternatives examined 
as part of the regulatory impact analysis and included in chapter 17 of 
the final rule TSD.
    Additional compliance flexibilities may be available through other 
means. EPCA provides that a manufacturer whose annual gross revenue 
from all 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

[[Page 37939]]

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

D. Review Under the National Environmental Policy Act of 1969

    Pursuant to the National Environmental Policy Act of 1969 
(``NEPA''), DOE has analyzed this proposed action rule in accordance 
with NEPA and DOE's NEPA implementing regulations (10 CFR part 1021). 
DOE has determined that this rule qualifies for categorical exclusion 
under 10 CFR part 1021, subpart D, appendix B5.1 because it is a 
rulemaking that establishes energy conservation standards for consumer 
products or industrial equipment, none of the exceptions identified in 
B5.1(b) apply, no extraordinary circumstances exist that require 
further environmental analysis, and it meets the requirements for 
application of a categorical exclusion. See 10 CFR 1021.410. Therefore, 
DOE has determined that promulgation of this rule is not a major 
Federal action significantly affecting the quality of the human 
environment within the meaning of NEPA and does not require an 
environmental assessment or an environmental impact statement.

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.
    In the July 2023 NOPR, DOE tentatively determined that the proposed 
rule 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. 88 FR 49058, 49170. Furthermore, DOE stated that EPCA 
governs and prescribes Federal preemption of State regulations as to 
energy conservation for the products that are the subject of the 
proposed rule and that States can petition DOE for exemption from such 
preemption to the extent, and based on criteria, set forth in EPCA. Id. 
(citing 42 U.S.C. 6297). Accordingly, DOE concluded that no further 
action was required by E.O. 13132.
    As initially discussed in section III.A.2 of this document, the 
Attorney General of TN commented that the proposed standards have 
significant federalism implications within the meaning of Executive 
Order 13132 because: (1) DOE's standards have a preemptive effect on 
States' procurement standards; and (2) States own and purchase water 
heaters and therefore the proposed standards' effect on water heater 
costs directly affect States as purchasers. (Attorney General of TN, 
No. 1149 at pp. 2-3)
    DOE reiterates that this final rule does not have significant 
federalism implications. DOE has examined this rule and has 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 final rule. Additionally, Federal energy efficiency 
requirements for covered products established under EPCA, including 
consumer water heaters, generally supersede State laws and regulations 
concerning energy conservation testing, labeling, and standards. (42 
U.S.C. 6297(a)-(c)) 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.
    Even if DOE were to find otherwise, with regards to the Attorney 
General of TN's arguments regarding E.O. 13132, DOE notes that the 
Attorney General of TN does not provide any examples of a state 
procurement rule that conflicts with the standards adopted in this 
rulemaking and DOE is not aware of any such conflicts, nor has the 
Attorney General of TN provided any examples of States owning and 
purchasing a substantial number of consumer water heaters. While it is 
possible that a State may have to revise its procurement standards to 
reflect the new standards, States can petition DOE for exemption from 
such preemption to the extent, and based on criteria, set forth in 
EPCA. Absent such information, DOE concludes that no further action 
would be required by E.O. 13132 even if the Executive order were 
applicable here. Moreover, assuming the hypothetical preemption alleged 
by the Attorney General of TN were to present itself, DOE notes that, 
like all interested parties, states were presented with an opportunity 
to engage in the rulemaking process early in the development of the 
proposed rule. Prior to publishing the proposed rulemaking, on May 21, 
2020, DOE published and sought public comment on an RFI to collect data 
and information to help DOE determine whether any new or amended 
standards for consumer water heaters would result in a significant 
amount of additional energy savings and whether those standards would 
be technologically feasible and economically justified. 85 FR 30853. 
DOE then published a notice of public meeting and availability of the 
preliminary TSD on March 1, 2022, and sought public comment again. 87 
FR 11327. DOE then held a public meeting on April 12, 2022, to discuss 
and receive comments on the preliminary TSD, which was open to the 
public, including state agencies. As such, states were provided the 
opportunity for meaningful and substantial input as envisioned by the 
Executive order.

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

[[Page 37940]]

affecting clarity and general draftsmanship under any guidelines issued 
by the Attorney General. Section 3(c) of E.O. 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 final 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, sec. 201 (codified at 2 U.S.C. 1531). 
For a 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 ``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 
energy.gov/sites/prod/files/gcprod/documents/umra_97.pdf.
    DOE has concluded that this final rule 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 heater 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 final 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 document and the TSD for this 
final rule respond to those requirements.
    Under section 205 of UMRA, DOE 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 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 final rule establishes new and 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 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 final 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 proposed rule or policy that may affect 
family well-being. Although this final rule would not have any impact 
on the autonomy or integrity of the family as an institution as 
defined, this rule could impact a family's well-being. When developing 
a Family Policymaking Assessment, agencies must assess whether: (1) the 
action strengthens or erodes the stability or safety of the family and, 
particularly, the marital commitment; (2) the action strengthens or 
erodes the authority and rights of parents in the education, nurture, 
and supervision of their children; (3) the action helps the family 
perform its functions, or substitutes governmental activity for the 
function; (4) the action increases or decreases disposable income or 
poverty of families and children; (5) the proposed benefits of the 
action justify the financial impact on the family; (6) the action may 
be carried out by State or local government or by the family; and 
whether (7) the action establishes an implicit or explicit policy 
concerning the relationship between the behavior and personal 
responsibility of youth, and the norms of society.
    DOE has considered how the benefits of this rule compare to the 
possible financial impact on a family (the only factor listed that is 
relevant to this rule). As part of its rulemaking process, DOE must 
determine whether the energy conservation standards contained in this 
final rule are economically justified. As discussed in section V.C.1 of 
this document, DOE has determined that the standards are economically 
justified because the benefits to consumers far outweigh the costs to 
manufacturers. Families will also see LCC savings as a result of this 
rule. Moreover, as discussed further in section V.B.1 of this document, 
DOE has determined that for the for low-income households, average LCC 
savings and PBP at the considered efficiency levels are improved (i.e., 
higher LCC savings and lower payback period) as compared to the average 
for all households. Further, the standards will also result in climate 
and health benefits for families.

I. Review Under Executive Order 12630

    Pursuant to E.O. 12630, ``Governmental Actions and Interference 
with Constitutionally Protected Property Rights,'' 53 FR 8859 (March 
18, 1988), DOE has determined that this 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/7=2019/12/f70/DOE%20Final%20Updated%20IQA%20Guidelines%20Dec%202019.pdf. DOE has 
reviewed this final rule under the OMB and DOE guidelines and has

[[Page 37941]]

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 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 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 concluded that this regulatory action, which sets forth new 
and amended energy conservation standards for consumer water heaters, 
is not a significant energy action because the 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 final 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 prepared a report describing that peer 
review.\211\ 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 DOE's analyses. DOE is in the 
process of evaluating the resulting report.\212\
---------------------------------------------------------------------------

    \211\ 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).
    \212\ The report is available at www.nationalacademies.org/our-work/review-of-methods-for-setting-building-and-equipment-performance-standards.
---------------------------------------------------------------------------

M. Congressional Notification

    As required by 5 U.S.C. 801, DOE will report to Congress on the 
promulgation of this rule prior to its effective date. The Office of 
Information and Regulatory Affairs has determined that this rule meets 
the criteria set forth in 5 U.S.C. 804(2).

VII. Approval of the Office of the Secretary

    The Secretary of Energy has approved publication of this final 
rule.

List of Subjects

10 CFR Part 429

    Administrative practice and procedure, Confidential business 
information, Energy conservation, Household appliances, Reporting and 
recordkeeping requirements.

10 CFR Part 430

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

Signing Authority

    This document of the Department of Energy was signed on April 24, 
2024, by Jeffrey Marootian Principal Deputy 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 April 24, 2024.
Treena V. Garrett,
Federal Register Liaison Officer, U.S. Department of Energy.

    For the reasons set forth in the preamble, DOE amends 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 revising paragraph (a)(1)(ii)(C) and adding 
paragraph (a)(1)(ii)(E) to read as follows:


Sec.  429.17  Water heaters.

    (a) * * *
    (1) * * *
    (ii) * * *
    (C) Any represented value of the rated storage volume must be equal 
to the mean of the measured storage volumes of all the units within the 
sample. Any represented value of the effective storage volume must be 
equal to the mean of the effective storage volumes of all the units 
within the sample.
* * * * *
    (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 Sec.  
430.2 of this chapter, whose rated storage volumes

[[Page 37942]]

are less than 20 gallons or greater than 55 gallons, 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 Sec.  430.32(d)(1) of this chapter, any represented value 
of uniform energy factor shall be determined based on testing in 
accordance with section 5.1.1 of appendix E to subpart B of 10 CFR part 
430.
    (2) To demonstrate compliance with the energy conservation 
standards in Sec.  430.32(d)(2) of this chapter, 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 to subpart B of 
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 (d)(4)(i) and (ii) of this section. 
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 Sec.  430.2 of this chapter) 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 Sec.  430.32(d) of this chapter. 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 Sec.  431.110(a) of this chapter. 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 Sec.  431.110(a) of this 
chapter. 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 Sec.  431.110(a) of this 
chapter. 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 
Sec.  431.110(a) of this chapter. 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 
Sec.  431.110(a) of this chapter. 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 Sec.  
431.110(a) of this chapter.
* * * * *

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. Revising the definition of ``Circulating water heater'';
0
 b. Adding in alphabetical order the definitions of ``Electric 
circulating water heater'', ``Gas-fired circulating water heater'', and 
``Oil-fired circulating water heater''; and
0
 c. Revising the definition of ``Tabletop water heater''.
    The revisions and additions read as follows:


Sec.  430.2   Definitions.

* * * * *
    Circulating water heater means a 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 to circulate water 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 circulating water heater 
constitutes a storage-type water heater.
* * * * *
    Electric circulating water heater means a circulating water heater 
with an input of 12 kW or less (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 75,000 Btu/h or less.
* * * * *
    Oil-fired circulating water heater means a circulating water heater 
with a nominal input of 105,000 Btu/h or less.
* * * * *
    Tabletop water heater means a water heater in a rectangular box 
enclosure

[[Page 37943]]

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 in 
section 5.4.1 of appendix E to subpart B of this part.
* * * * *


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:
    (A) The product of the annual gas or oil energy consumption, 
determined according to section 6.3.11 or 6.4.7 of appendix E to this 
subpart, times the representative average unit cost of gas or oil, as 
appropriate, in dollars per Btu as provided by the Secretary; plus
    (B) The product of the annual electric energy consumption, 
determined according to section 6.3.10 or 6.4.6 of appendix E to 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 to 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 to this subpart.
* * * * *


0
 7. Appendix E to subpart B is amended by revising the Note and 
sections 1.19, 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 May 6, 2029, 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 May 6, 2029, consumer water heaters subject to section 
5.1.2 of this appendix (as specified at Sec.  429.17(a)(1)(ii)(E) of 
this chapter) 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 May 6, 2029, representations with respect to energy 
use or efficiency of consumer water heaters subject to sections 4.10 
and 5.1.2 of this appendix must be based on testing conducted in 
accordance with those provisions.
* * * * *
    1. * * *
    1.19 Water Heater Requiring a Storage Tank means a water heater 
without a storage tank supplied by the manufacturer that cannot meet 
the requirements of sections 2 and 5 of this appendix without the 
use of a storage water heater or unfired hot water storage tank.
* * * * *
    4. * * *
    4.10 Storage Tank Requirement for Water Heaters Requiring a 
Storage Tank (i.e., Circulating Water Heaters). On or after May 6, 
2029, 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 of this appendix that meets but does not exceed the 
minimum energy conservation standards required according to Sec.  
431.110 of this chapter. 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 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 Sec.  430.32(d), rounded to 
the nearest 0.01. The operational mode of the heat pump circulating 
water heater and storage water heater paired system shall be set in 
accordance with section 5.1.1 of this appendix. 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 capable of achieving a 
Tmax,1 above 135 [deg]F. The following exceptions apply:
    (1) Electric storage water heaters that do not have a permanent 
mode or setting in which the water heater is capable of heating and 
storing water above 135 [deg]F (as measured by Tmax,1), 
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;
    (2) Electric storage water heaters that meet the definition of 
``heat pump-type'' water heater at Sec.  430.2;
    (3) Electric storage water heaters 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.
    (4) Electric storage water heaters with measured storage volumes 
(Vst) less than 20 gallons or greater than 55 gallons.
    This paragraph may optionally apply to electric heat pump water 
heaters for voluntary representations of high-temperature operation 
only.
    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 of this 
appendix 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 * * *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

[[Page 37944]]

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) The uniform energy factor of water heaters 
manufactured May 6, 2029 shall not be less than the following:

----------------------------------------------------------------------------------------------------------------
                                     Rated storage volume
           Product class             and input rating (if        Draw pattern         Uniform energy factor \1\
                                         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)
----------------------------------------------------------------------------------------------------------------
\1\ Vr is the rated storage volume (in gallons), as determined pursuant to Sec.   429.17 of this chapter.

    (2) The uniform energy factor of water heaters manufactured on or 
after May 6, 2029 shall not be less than the following:

----------------------------------------------------------------------------------------------------------------
                                     Rated storage volume
           Product class             and input rating (if        Draw pattern         Uniform energy factor \1\
                                         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)

[[Page 37945]]

 
                                    .....................  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
                                     electric storage
                                     water heaters).
                                    .....................  Low.....................                         2.30
                                    .....................  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.............  Very Small..............     0.6323 - (0.0058 x Veff)
                                    .....................  Low.....................     0.9188 - (0.0031 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)
----------------------------------------------------------------------------------------------------------------
\1\ Veff is the Effective Storage Volume (in gallons), as determined pursuant to Sec.   429.17 of this chapter.

    (3) The provisions of paragraph (d) of this section are separate 
and severable from one another. Should a court of competent 
jurisdiction hold any provision(s) of paragraph (d) of this section to 
be stayed or invalid, such action shall not affect any other provision 
of paragraph (d) of this section.
* * * * *
    Note: The following letter will not appear in the Code of Federal 
Regulations.


October 12, 2023

U.S. DEPARTMENT OF JUSTICE, Antitrust Division, Ami Grace-Tardy, 
Assistant General Counsel for Legislation, Regulation and Energy 
Efficiency, U.S. Department of Energy, Washington, DC 20585


Re: Energy Conservation Standards for Consumer Water Heaters DOE Docket 
No. EERE-2017-BT-STD-0019
Dear Assistant General Counsel Grace-Tardy:
    I am responding to your August 23, 2023 letter seeking the views of 
the Attorney General about the potential impact on competition of 
proposed energy conservation standards for consumer water heaters.
    Your request was submitted under Section 325(o)(2)(B)(i)(V) of the 
Energy Policy and Conservation Act, as amended (ECPA), 42 U.S.C. 
6295(o)(2)(B)(i)(V), which requires the Attorney General to determine 
the impact of any lessening of competition that is likely to result 
from the imposition of proposed energy conservation standards. The 
Attorney General's responsibility for responding to requests from other 
departments about the effect of a program on competition has been 
delegated to the Assistant Attorney General for the Antitrust Division 
in 28 CFR 0.40(g). The Assistant Attorney General for the

[[Page 37946]]

Antitrust Division has authorized me, as the Policy Director for the 
Antitrust Division, to provide the Antitrust Division's views regarding 
the potential impact on competition of proposed energy conservation 
standards on his behalf.
    In conducting its analysis, the Antitrust Division examines whether 
a proposed standard may lessen competition, for example, by 
substantially limiting consumer choice, by placing certain 
manufacturers at an unjustified competitive disadvantage, or by 
inducing avoidable inefficiencies in production or distribution of 
particular products. A lessening of competition could result in higher 
prices to manufacturers and consumers.
    We have reviewed the proposed standards contained in the notice of 
proposed rulemaking (``NOPR'') (88 FR 49058, July 28, 2023) and the 
related Technical Support Document. We have also reviewed public 
comments and information provided by industry participants and have 
reviewed the transcript and information presented at the Webinar of the 
Public Meeting held on September 13, 2023. Based on this review, we do 
not have an evidentiary basis to conclude that the proposed energy 
conservation standards for consumer water heaters are likely to 
substantially lessen competition.

Sincerely,
David G.B. Lawrence,
Policy Director.
[FR Doc. 2024-09209 Filed 5-3-24; 8:45 am]
BILLING CODE 6450-01-P