Energy Conservation Program for Consumer Products: Energy Conservation Standards for Residential Furnaces and Boilers

DEPARTMENT OF ENERGY

Office of Energy Efficiency and Renewable Energy

10 CFR Part 430

[Docket Number EE-RM/STD-01-350]

RIN 1904-AA78

Energy Conservation Program for Consumer Products: Energy Conservation Standards for Residential Furnaces and Boilers

AGENCY:

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

ACTION:

Notice of proposed rulemaking and public meeting.

SUMMARY:

The Energy Policy and Conservation Act (EPCA or the Act) prescribes energy conservation standards for various consumer products and commercial and industrial equipment, and requires the Department of Energy (DOE or the Department) to determine if amendments to increase the stringency of the standards are technologically feasible and economically justified, and if they would save a significant amount of energy. In this notice, the Department is proposing to amend the energy conservation standards for residential furnaces and boilers and is announcing a public meeting.

DATES:

The Department will hold a public meeting on October 30, 2006, from 9 a.m. to 4 p.m., in Washington, DC. The Department must receive requests to speak at the public meeting before 4 p.m., October 16, 2006. The Department must receive a signed original and an electronic copy of statements to be given at the public meeting before 4 p.m., October 16, 2006.

The Department will accept comments, data, and information regarding the notice of proposed rulemaking (NOPR) before and after the public meeting, but no later than January 15, 2007. See section VII, “Public Participation,” of this notice for details.

ADDRESSES:

You may submit comments, identified by docket number EE-RM/STD-01-350 and/or regulatory information number (RIN) 1904-AA78, by any of the following methods:

1.

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.

2.

E-mail: ResidentialFBNOPRComments@ee.doe.gov.

Include docket number EE-RM/STD-01-350 and/or RIN number 1904-AA78 in the subject line of the message.

3.

Mail:

Ms. Brenda Edwards-Jones, U.S. Department of Energy, Building Technologies Program, Mailstop EE-2J, NOPR for Residential Furnaces and Boilers, Docket Number EE-RM/STD-01-350 and/or RIN number 1904-AA78, 1000 Independence Avenue, SW., Washington, DC 20585-0121. Please submit one signed original paper copy.

4.

Hand Delivery/Courier:

Ms. Brenda Edwards-Jones, U.S. Department of Energy, Building Technologies Program, Room 1J-018, 1000 Independence Avenue, SW., Washington, DC 20585-0121. Telephone: (202) 586-2945. Please submit one signed original paper copy.

Instructions:

All submissions received must include the agency name and Docket Number or RIN for this rulemaking. For detailed instructions on submitting comments and additional information on the rulemaking process, see section VII, “Public Participation,” of this notice for details.

Docket:

For access to the docket to read background documents or comments received, visit the U.S. Department of Energy, Forrestal Building, Room 1J-018 (Resource Room of the Building Technologies Program), 1000 Independence Avenue, SW., Washington, DC 20585-0121, (202) 586-2945, between 9 a.m. and 4 p.m., Monday through Friday, except Federal holidays. Please call Ms. Brenda Edwards-Jones at the above telephone number for additional information regarding visiting the Resource Room. Please note: The Department's Freedom of Information Reading Room (formerly Room 1E-190 at the Forrestal Building) is no longer housing rulemaking materials.

FOR FURTHER INFORMATION CONTACT:

Mohammed Khan, Project Manager, Energy Conservation Standards for Residential Furnaces and Boilers, U.S. Department of Energy, Energy Efficiency and Renewable Energy, Building Technologies Program, EE-2J, 1000 Independence Avenue, SW., Washington, DC 20585-0121, (202) 586-7892, e-mail:

Mohammed.Khan@ee.doe.gov.

Francine Pinto, Esq., U.S. Department of Energy, Office of the General Counsel, GC-72, 1000 Independence Avenue, SW., Washington, DC 20585-0121, (202) 586-9507, e-mail:

Francine.Pinto@hq.doe.gov.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Summary of the Proposed Rule

II. Introduction

A. Consumer Overview

B. Authority

C. Background

1. Current Standards

2. History of Standards Rulemaking for Residential Furnaces and Boilers

3. Process Improvement

D. Negotiated Boiler Standards Agreement

III. General Discussion

A. General Issues

1. Impact of Furnace and Boiler Standards on Future Natural Gas Prices

2. Inclusion of Electricity Consumption in Furnace and Boiler Standards

3. Separate Standards for Equipment Installed in New Homes and as Replacements

4. Separate Standards for Different Regions

B. Test Procedures

C. Technological Feasibility

1. General

2. Maximum Technologically Feasible Levels

D. Energy Savings

1. Determination of Savings

2. Significance of Savings

E. Economic Justification

1. Specific Criteria

a. Economic Impact on Manufacturers and Consumers

b. Life-Cycle Costs

c. Energy Savings

d. Lessening of Utility or Performance of Products

e. Impact of Any Lessening of Competition f. Need of the Nation to Conserve Energy

g. Other Factors

2. Rebuttable Presumption

IV. Methodology and Discussion of Comments

A. Product Classes

B. Engineering Analysis

1. Manufacturing Costs

2. Markups

3. Installation Costs

a. Non-Weatherized Gas Furnaces

b. Other Product Classes

4. Maintenance Costs

5. Rebuttable-Presumption Payback Period

C. Life-Cycle Cost and Payback Period Analysis

1. Equipment Prices

2. Installation Costs

3. Household Annual Energy Consumption

4. Energy Prices

5. Maintenance Costs

6. Equipment Lifetime

7. Discount Rates

8. Effective Date of the New Standards

9. Inputs to Payback Period Analysis

10. Base-Case Equipment

D. National Impact Analysis—National Energy Savings and Net Present Value Analysis

1. Shipments, National Energy Savings, and Net Present Value

2. Annual Unit Energy Consumption

3. Site-to-Source Conversion Factors

4. Installed Equipment Costs

5. Maintenance Costs

6. Energy Prices

7. Discount Rates

E. Consumer Subgroup Analysis

F. Manufacturer Impact Analysis

1. General Description

2. Industry Profile

3. Industry Cash Flow Analysis

4. Subgroup Impact Analysis

5. Government Regulatory Impact Model Analysis

6. Manufacturer Interviews

a. Issues

b. GRIM Scenarios and Key Inputs

1. Shipments Forecast

2. Markups

3. Product and Capital Conversion Costs

G. Employment Impact Analysis

H. Utility Impact Analysis

I. Environmental Analysis

V. Analytical Results

A. Trial Standard Levels

B. Economic Justification and Energy Savings

1. Economic Impacts on 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

i. Non-Weatherized Gas Furnaces

ii. Weatherized Gas Furnaces

iii. Mobile Home Gas Furnaces

iv. Oil-Fired Furnaces

v. Gas Boilers

vi. Oil-Fired Boilers

b. Impacts on Manufacturing Capacity

c. Impacts on Subgroups of Manufacturers

d. Cumulative Regulatory Burden

3. National Impact Analysis

a. Significance of Energy Savings

b. Net Present Value

c. 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

C. Proposed Standard

VI. Procedural Issues and Regulatory Review

A. Review Under Executive Order 12866

B. Review Under the Regulatory Flexibility Act

C. Review Under the Paperwork Reduction Act

D. Review Under the National Environmental Policy Act

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 of 1999

I. Review Under Executive Order 12630

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

K. Review Under Executive Order 13211

L. Review Under the Information Quality Bulletin for Peer Review

M. Review Under Executive Order 12898

VII. Public Participation

A. Attendance at Public Meeting

B. Procedure for Submitting Requests to Speak

C. Conduct of Public Meeting

D. Submission of Comments

E. Issues on Which DOE Seeks Comment

VIII. Approval of the Office of the Secretary

I. Summary of the Proposed Rule

The Energy Policy and Conservation Act (EPCA or the Act), as amended, specifies that any new or amended energy conservation standard the Department of Energy (DOE or the Department) prescribes for consumer products shall be designed to “achieve the maximum improvement in energy efficiency * * * which the Secretary 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)) In accordance with these and other statutory criteria discussed in this notice, the Department proposes to amend the residential furnace and boiler energy conservation standards and raise efficiency levels as shown in Table I.1. The proposed standards would apply to all covered furnaces and boilers offered for sale in the United States, effective on January 1, 2015.

Table I.1.—Proposed Standard Levels for Furnaces and Boilers

Product class

AFUE

(%)

Non-weatherized gas furnaces

80

Weatherized gas furnaces

83

Mobile home gas furnaces

80

Oil-fired furnaces

82

Gas boilers

84

Oil-fired boilers

83

AFUE = annual fuel utilization efficiency.

The Department's analyses indicate that the proposed standards would save a significant amount of energy—an estimated 0.41 quadrillion British thermal units (Btu), or quads, of cumulative energy over 24 years (2015-2038). For comparison, approximately six quads are used annually for space heating in U.S. homes. The economic impacts on consumers—

i.e.,

the average life-cycle cost (LCC) savings—are positive.

The cumulative national net present value (NPV) of total consumer costs and savings of the proposed standard (DOE's trial standard level 2, or TSL2) from 2015 to 2038, in 2004$, ranges from $650 million (seven-percent discount rate) to $2.48 billion (three-percent discount rate). This is the estimated total value of future operating-cost-savings minus the estimated increased equipment costs, discounted to 2004. The Department estimated the furnace and boiler industry net present value (INPV) to be approximately $1.6 billion in 2004$. If the Department adopts the proposed standard, it expects manufacturers will lose 4.1 to 7 percent of the INPV, which is approximately $65-114 million. The NPV for consumers (at the seven-percent discount rate) exceeds industry losses due to energy efficiency standards by about seven times.

The proposed standard will lead to reductions in greenhouse gas emissions, resulting in cumulative (undiscounted) emission reductions of 19.6 million tons (Mt) of carbon dioxide (CO

2

) from 2015 to 2038. Additionally, the standard would result in 13.0 thousand tons (kt) of nitrogen oxides (NO

X

) emissions reductions or generate a similar amount of NO

X

emissions allowance credits in areas where such emissions are subject to emissions caps. The standard would also generate 1.5 kt of sulfur dioxide (SO

2

) emissions reductions from 2015 to 2038. Most of the energy saved is natural gas. In addition, the Department expects the energy savings from the proposed standards to eliminate the need for approximately 14 megawatts (MW) of generating capacity by 2030.

The above results reflect the Department's use of energy price projections from the U.S. Energy Information Administration (EIA)'s

Annual Energy Outlook 2005 (AEO2005).

In addition, the Department performed a sensitivity analysis to assess the impacts of the standard using the

Annual Energy Outlook 2006 (AEO2006)

energy price forecasts. In this sensitivity analysis, the proposed standards would save the same amount of energy (0.41 quads) over 2015-2038. The cumulative NPV of total consumer costs and savings of the proposed standard from 2015 to 2038, in 2004$, ranges from $820 million (seven-percent discount rate) to $3.02 billion (three-percent discount rate). The other results are approximately the same as in the analysis using

AEO2005

.

The Department has found the proposed standard represents the maximum improvement in energy efficiency that is technologically feasible and economically justified. The Department found the benefits to the Nation of the proposed standard (energy savings, consumer average LCC savings, national NPV increase, and emission reductions) outweigh the costs (loss of manufacturer NPV, and LCC increases for some consumers). The Department considered higher energy efficiency levels as trial standard levels; however, it found the burdens of the higher efficiency levels (loss of manufacturer NPV, LCC increases for some consumers, and safety concerns) outweigh the benefits (energy savings, LCC savings for some consumers, national NPV increase, and emission reductions). The Department concludes that the proposed standard is economically justified. Furthermore, DOE has found that the proposed standard is technologically feasible since products achieving these

efficiencies already are commercially available.

II. Introduction

A. Consumer Overview

The Department is proposing to raise the energy conservation standard levels for residential furnaces and boilers as shown above in Table II.1. The proposed efficiency standard would apply to all covered furnaces and boilers offered for sale in the United States, effective on January 1, 2015. Relative to the current standard levels, the proposed levels for residential furnaces and boilers represent an improvement in energy efficiency of one to five percent, depending on the product class.

Table II.1.—Proposed Standard Levels for Furnaces and Boilers

Product class

AFUE

(%)

Non-weatherized gas furnaces

80

Weatherized gas furnaces

83

Mobile home gas furnaces

80

Oil-fired furnaces

82

Gas boilers

84

Oil-fired boilers

83

AFUE = annual fuel utilization efficiency.

B. Authority

Title III of EPCA sets forth a variety of provisions designed to improve energy efficiency. Part B of title III (42 U.S.C. 6291-6309) provides for the Energy Conservation Program for Consumer Products other than Automobiles. The program covers consumer products (referred to hereafter as “covered products”), including residential furnaces and boilers. (42 U.S.C. 6292(a)(5))

Under the Act, the program consists essentially of these parts: Testing, labeling, and Federal energy conservation standards. The Federal Trade Commission (FTC) is responsible for labeling, and DOE implements the remainder of the program. Section 323 of the Act authorizes the Department, with assistance from the National Institute of Standards and Technology (NIST) and subject to certain criteria and conditions, to develop test procedures to measure the energy efficiency, energy use, or estimated annual operating cost of each covered product. (42 U.S.C. 6293) The furnace and boiler test procedures appear at Title 10 of the Code of Federal Regulations (CFR) part 430, subpart B, Appendix N.

EPCA provides criteria for prescribing new or amended standards for covered products. As indicated above, any new or amended standard for a covered product must be designed to achieve the maximum improvement in energy efficiency that is technologically feasible and economically justified. (42 U.S.C. 6295(o)(2)(A)) EPCA precludes the Department from adopting any standard that would not result in significant conservation of energy. (42 U.S.C. 6295(o)(3)(B)) Moreover, the Department may not prescribe a standard: (1) For certain products, 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)(B) The Act (42 U.S.C. 6295(o)(2)(B)(i)) also provides that, in deciding whether a standard is economically justified, DOE must, after receiving comments on the proposed standard, determine whether the benefits of the standard exceed its burdens by considering, to the greatest extent practicable, the following seven 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 imposition of the standard;

(3) The total projected amount of energy savings likely to result directly from the imposition of the standard;

(4) Any lessening of the utility or the performance of the covered products likely to result from the imposition of the standard;

(5) The impact of any lessening of competition, as determined in writing by the Attorney General, that is likely to result from the imposition of the standard;

(6) The need for national energy conservation; and

(7) Other factors the Secretary considers relevant.

EPCA contains what is commonly known as an “anti-backsliding” provision. (42 U.S.C. 6295(o)(1)) This provision mandates that the Secretary not prescribe any amended standard that either increases the maximum allowable energy use or decreases the minimum required energy efficiency of a covered product. Also, the Secretary may not prescribe an amended or a 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 of any covered product type (or class) with performance characteristics, features, sizes, capacities, and volume that are substantially the same as those generally available in the United States. (42 U.S.C. 6295 (o)(4))

In addition, section 325(o)(2)(B)(iii) of 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 efficiency 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 * * *.” The rebuttable-presumption test is an alternative path to establishing economic justification. (42 U.S.C. 6295(o)(2)(B)(iii))

Section 325(q)(1) of EPCA is applicable to promulgating a standard for a type or class of covered product that has two or more subcategories. The Department must specify a different standard level than that which applies generally to such type or class of products “for any group of covered products which have the same function or intended use, if * * * 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” that applies or will apply to the other products. (42 U.S.C.6295(q)(l)) In determining whether a performance-related feature justifies such a different standard for a group of products, the Department must consider “such factors as the utility to the consumer of such a feature” and other factors DOE deems appropriate. 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))

Federal energy conservation requirements generally supersede State laws or regulations concerning energy conservation testing, labeling, and standards. (42 U.S.C. 6297 (a)-(c)) The Department can, however, grant waivers of preemption for particular State laws or regulations, in accordance with the procedures and other provisions of section 327(d) of the Act. (42 U.S.C. 6297(d)) Specifically, States with a regulation that provides for an energy conservation standard for any type of covered product for which there is a Federal energy conservation standard may petition the Secretary for a DOE rule that allows the State regulation to become effective with respect to such covered product. The Department must prescribe a rule granting the petition if the State establishes by a preponderance

of the evidence that its regulation is needed to meet “unusual and compelling State or local energy * * * interests.” (42 U.S.C. 6297(d)(1)(B))

C. Background

1. Current Standards

EPCA established an energy conservation standard for residential furnaces and boilers.

1

It set the standard in terms of the annual fuel utilization efficiency (AFUE) descriptor at a minimum value of 78 percent for most furnaces. It set the minimum AFUE at 75 percent for gas steam boilers and 80 percent for other boilers. For mobile home furnaces, EPCA set the minimum AFUE at 75 percent. These standards became effective on January 1, 1992, with the exception of the standard for mobile home furnaces, for which the effective date was September 1, 1990. (42 U.S.C. 6295(f)(1)-(2))

1

EPCA states that a “furnace” includes forced-air and gravity central furnaces and low-pressure steam and hot water boilers, and that it must have a heat input rate of less than 225,000 Btu/h for forced-air and gravity central furnaces, and less than 300,000 Btu/h for boilers. (42 U.S.C. 6291(23)) However, in this notice, DOE has adopted the terminology used in the heating, ventilating, and air conditioning industry, which considers furnaces and boilers as separate categories.

2. History of Standards Rulemaking for Residential Furnaces and Boilers

For “small” gas furnaces (those having an input rate of less than 45,000 Btu per hour), the Department published a final rule on November 17, 1989, in which it set the minimum AFUE for these products at 78 percent, effective January 1, 1992. 54 FR 47916.

For mobile home furnaces, the Department issued an advance notice of proposed rulemaking (ANOPR) on September 28, 1990 (55 FR 39624), followed by a proposed rule on March 4, 1994. 59 FR 10464. The Interior and Related Agencies Appropriations for Fiscal Year 1996 (Pub. L. 104-34) included a moratorium on appliance standards rulemakings, preventing DOE from finalizing the standards on mobile home furnaces. The Department responded to the moratorium by developing an improved process, known as the Process Rule, for its energy conservation standards rulemakings (

Procedures for Consideration of New or Revised Energy Conservation Standards for Consumer Products,

Title 10 CFR part 430, Subpart C, Appendix A). 61 FR 36974. The Process Rule provided guidance on how DOE prioritizes its standards rulemakings. As a result, the Department pursued standards rulemakings for other products rather than finalizing the proposed standard for mobile home furnaces. Therefore, the Department did not publish a final rule for amending mobile home furnace standards and the minimum energy conservation standard remained at 75 percent AFUE.

The Act also directed the Department to publish a final rule to determine whether the standards should be amended for all furnaces and boilers. (42 U.S.C. 6295(f)(3)(B)) On September 8, 1993, the Department published an ANOPR (hereafter referred to as the September 1993 ANOPR) in which it presented the product classes for furnaces that it planned to analyze, and a detailed discussion of the analytical methodology that it expected to use in this rulemaking. 58 FR 47326. The Department invited stakeholders to submit comments and data on the planned methodology. However, the 1996 moratorium on appliance standards rulemakings prevented DOE from proceeding further with the rulemaking process.

2

2

Pub. L. 104-34, the Department of the Interior and Related Agencies Appropriations Act for Fiscal Year 1996 which included a moratorium on proposing or issuing energy conservation appliance standard for FY 1996.

In the fiscal year 2001 Priority Setting for the Appliance Rulemaking Process, DOE assigned a high level of priority to a rulemaking to consider amendments to the energy conservation standards for residential furnaces and boilers, including mobile home furnaces. On June 13, 2001, DOE published a

Framework Document for Residential Furnaces and Boilers Standards Rulemaking

(Framework Document). The Department held a public meeting on July 17, 2001, to discuss the procedural and analytical approaches in this rulemaking, and to seek stakeholder comments on the Framework Document.

The Department held another public meeting on May 8, 2002, to receive and discuss comments on issues related to venting installations. In June 2002, the Gas Appliance Manufacturers Association (GAMA) commented on DOE's analysis of manufacturing costs. In August 2002, GAMA convened a meeting with DOE and the American Council for an Energy-Efficient Economy (ACEEE) to discuss approaches for analyzing electricity use in furnaces. In September 2002, the Department posted its engineering analysis and received stakeholder comments. The Department published an ANOPR on July 29, 2004 (hereafter referred to as the 2004 ANOPR), and held a public meeting on September 29, 2004, to present the methodology and results of the ANOPR analyses. 69 FR 45419.

As set forth in the updated rulemaking timeline published in the Department's Semi-annual Regulatory Agenda on December 13, 2004, DOE expects to issue a final rule in 2007. 69 FR 72713. The effective date for any new standards for furnaces and boilers published in 2007 would be 2015, or eight years after publication as a final rule in the

Federal Register

. (42 U.S.C. 6295 (f)(3)(B))

3. Process Improvement

The Process Rule applies to the development of energy conservation standards for all consumer products, including those for residential furnaces and boilers. 61 FR 36974. In this notice, the Department describes the framework and methodologies by which it is developing the standard. The framework and methodologies reflect improvements made and steps taken in accordance with the Process Rule, including the use of improved economic models and analytical tools. The rulemaking process is dynamic, and as timely new data, models, or tools that enhance the development of standards become available, the Department will incorporate them into the rulemaking.

In response to the DOE's 2004 ANOPR, the American Gas Association (AGA) asserted that the spreadsheets used by the Department do not meet the requirements of the Process Rule, which specifies the use of transparent and robust analytical methods “that are fully documented for the public and that produce results that can be explained and reproduced * * *.” AGA suggested that DOE (1) explore simpler analytical methods for its analyses, or (2) provide stakeholders with more direct means of testing alternate assumptions and sensitivities. (AGA, No. 78 at p. 2)

3

Southern Company (Southern) commented that it would be helpful if DOE provided tools for the review of its analysis results that could be used more easily. (Southern, No. 71 at p. 3) After the 2004 ANOPR, DOE improved the design and user-friendliness of the analytical spreadsheets by creating process diagrams and by adding additional summary worksheets, help screens to assist the user, and input screens to allow the testing of alternate assumptions. The Department also expanded its documentation by adding

appendices that explain in detail the design and use of the spreadsheets.

3

A notation in the form “AGA, No. 78 at p. 2” identifies a written comment the Department has received and has included in the docket of this rulemaking. This particular notation refers to a comment (1) By the American Gas Association (AGA), (2) in the document number 78 in the docket of this rulemaking (maintained in the Resource Room of the Building Technologies Program), and (3) appear on page 2 of document number 78.

GAMA commented that there should be more informal communication between DOE and the furnace industry during the course of the rulemaking. (GAMA, No. 67 at p. 8) In accordance with the Process Rule, DOE sought stakeholder review at several points in the rulemaking and organized public meetings, webcasts, and conference calls to discuss important issues. The Department recognizes the value of having informal, open communication with stakeholders, as stakeholder input can contribute significantly to the quality of the Department's analyses and improve the Department's decision making. However, the open nature of the process has introduced substantial delays in the Department's rulemaking schedules. Such delays have been an unintended consequence of the Process Rule. The Department therefore, recognizes the need for a balance in the allowance of stakeholder input and maintaining rulemaking schedules, and will better integrate stakeholder input and expert review within the scope of the structured notice-and-comment rulemaking process.

D. Negotiated Boiler Standards Agreement

On July 14, 2006, GAMA and ACEEE, on behalf of 28 residential boiler manufacturers and four energy efficiency organizations, submitted a negotiated agreement recommending new national standards for residential boilers that would consist of a performance requirement (minimum AFUE levels) and design requirements. The recommended performance levels are the maximum that the industry feels would safeguard against corrosion and ensure safe venting. Both GAMA and ACEEE believe that the design requirements would bring about additional, non-trivial energy savings.

For gas-fired boilers, both water and steam types, the agreement calls for a ban on standing pilots. For gas-fired water boilers only, there are two design requirements. In addition to the ban on standing pilots, the agreement also requires a “temperature reset” feature that automatically adjusts the boiler output according to the outdoor ambient air temperature. For oil-fired water boilers, the agreement contains the design requirement for the same “temperature reset” feature.

The Department sincerely appreciates the effort stakeholders have made to propose an agreement for the boiler portion of this rulemaking. However, the Department has determined that the recommended standards in the negotiated agreement are beyond the scope of its legal authority. The Energy Policy and Conservation Act (EPCA) authorizes the Secretary to amend energy conservation standards for specified products. (42 U.S.C. 6295) Section 321(6) of the EPCA defines the term “energy conservation standard” as

(A) A performance standard which prescribes a minimum level of energy efficiency or a maximum quantity of energy use, * * * or

(B) A design requirement for the products specified in paragraphs (6), (7), (8), (10), (15), (16), (17), and (19) of section 322(a) * * * [of this title.]

(42 U.S.C. 6291(6))

The language of EPCA authorizes the Department to establish a performance standard or a single design standard. EPCA's list of specified products for which a design standard can be established does not include residential furnaces and boilers. As such, a standard that establishes both a performance standard and a design requirement is beyond the scope of the Department's legal authority. In the case of gas-fired water boilers, the agreement recommends two design requirements which is contrary to EPCA's limit of one design requirement for the specified covered products.

The Department's staff met with representatives from GAMA and ACEEE on August 1, 2006, and August 7, 2006, respectively, to discuss the Department's legal position on the negotiated agreement. The Department regrets that this negotiated agreement does not meet the statutory criteria in EPCA and therefore cannot be accepted. The Department strongly encourages stakeholders to continue to work together to propose agreements to the Department in the future, understanding that the Department must comply with EPCA's statutory requirements.

III. General Discussion

A. General Issues

The Department received comments on several general issues related to the furnace and boiler rulemaking. Those issues are related to the impact of the standards on future natural gas prices, furnace electricity consumption, separate standards for equipment in new homes and replacements, and separate standards for different regions.

1. Impact of Furnace and Boiler Standards on Future Natural Gas Prices

The Natural Resources Defense Council (NRDC), American Chemistry Council (ACC), ACEEE, and Dow Chemical Company commented that more stringent furnace and boiler standards may result in lower natural gas prices in the future, and that DOE should account for the associated benefit for all gas consumers. (NRDC, No. 52 at p. 2; ACC, No. 62 at p. 3; ACEEE, No. 84 at p. 9; and Joint Comment by NRDC and Dow, No. 64 at p. 3) The impact of appliance standards on energy prices has not historically been a part of DOE's analysis. Estimating such impacts would require new analytical methods. The Department evaluated a recent study that includes consideration of the impacts of furnace and boiler standards on natural gas prices.

4

While this study finds that standards could result in a small decrease in natural gas prices, the Department's review of the study reveals that there is no conclusive evidence that furnace and boiler standards will affect overall natural gas prices. If the stakeholders' assertion is correct, then consumer gas prices will decrease, in turn decreasing the income of gas utilities—resulting in a transfer of benefits from the natural gas producers to the consumers. However, on a societal level, there is no clear evidence that there will be any impact on natural gas prices resulting from the furnace and boiler standards. Furthermore, DOE believes it is currently impossible, within the framework of a standards rulemaking, to estimate the possible impact of energy conservation standards on utility prices. Therefore, the Department did not consider these impacts in the current rulemaking.

4

Wiser, R., M. Bolinger, M. St. Clair. Easing the Natural Gas Crisis: Reducing Natural Gas Prices through Increased Deployment of Renewable Energy and Energy Efficiency. LBNL. January 2005. (

http://eetd.lbl.gov/EA/EMP/reports/56756.pdf

).

2. Inclusion of Electricity Consumption in Furnace and Boiler Standards

The Department received a number of comments regarding the inclusion of furnace and boiler electricity consumption in amended standards for furnaces and boilers. The Department was recently given authority to regulate the electricity consumed by furnaces for the purposes of circulating air by the Energy Policy Act of 2005, Pub. L. 104-58 (EPACT 2005). EPACT 2005, section 135(c), amended section 325 of EPCA (42 U.S.C. 6295(f)(3)) to include the following: “[T]he Secretary may consider and prescribe energy conservation standards or energy use standards for electricity used for purposes of circulating air through duct work.” However, at the November 15, 2005, public meeting to discuss DOE's appliance-standards-program schedule-setting, the Department received comments from GAMA and the

Appliance Standards Awareness Project (ASAP) urging the Department to complete the AFUE standard rulemaking as soon as possible. Furthermore, GAMA and ASAP expressed their preference that DOE address furnace blower electricity consumption separately from the AFUE standard rulemaking. Since adding electricity consumption standards to this rulemaking would likely cause further substantial delay in the rulemaking process, the Department accepts the recommendations from GAMA and ASAP and has decided not to address furnace electricity consumption in this rulemaking. It will consider furnace electricity consumption separately to enable it complete the furnace and boiler AFUE rulemaking as expeditiously as possible.

3. Separate Standards for Equipment Installed in New Homes and as Replacements

ACEEE suggested that DOE consider separate standards for new construction and retrofits. (ACEEE, No. 53 at p. 5) EPCA directs the Department to establish performance standards that prescribe minimum levels of energy efficiency or maximum levels of energy use for covered products. The Act does not authorize DOE to set multiple levels of efficiency for a given covered product, depending on where the product is installed—either in terms of a given region of the country or in terms of home type,

i.e.,

new or existing. (42 U.S.C. 6291(6)(A)) The Department believes it does not have the authority to set separate standards for furnaces and boilers for new homes and for existing homes and, therefore, rejects the suggestion that it consider separate standards for new construction and retrofits.

4. Separate Standards for Different Regions

The Department received numerous comments regarding the setting of separate furnace and boiler standards for different regions of the country. Some of the commentators expressed reasons why separate standards would be beneficial or asked if DOE had the authority to set regional standards. (Ohio Consumers' Counsel (OCC), No. 70 at p. 5; Individuals, No. 73 at p. 1; Baltimore Gas and Electricity (BGE), No. 75 at p. 1; National Association of Regulatory Utility Commissioners (NARUC), No. 77 at p. 5; ACEEE, No. 59.8 at pp. 36

5

and 165; Individual, No. 87 at p. 1; Northeast Energy Efficiency Partnerships (NEEP), No. 55 at pp. 2 and 3; NRDC, No. 59.8 at pp. 29 and 33, and No. 63 at p. 9; Oregon Department of Energy (ODOE), No. 61 at p. 2; National Consumer Law Center (NCLC), No. 66 at pp. 7 and 8; New Jersey Board of Public Utilities (NJBPU), No. 83 at p. 1; Izaak Walton League of America (IWL), No. 88 at p. 1; Southern, No. 71 at p. 21 and No. 59.8 at p. 219; Trane, No. 59.8 at p. 207; GAMA, No. 59.8 at pp. 206 and 217; York, No. 65 at p. 2; Edison Electric Institute (EEI), No. 69 at p. 2; Manufactured Housing Institute (MHI), No. 89 at p. 2; National Propane Gas Association (NPGA), No. 72 at p. 2; AGA, No. 59.8 at p. 40; Alliance to Save Energy (ASE), No. 80 at p. 2; North American Insulation Manufacturers Association (NAIMA), No. 60 at p. 1; and Lennox, No. 79 at p. 3)

5

A notation in the form “ACEEE, No. 59.8 at p. 36,” identifies a comment in the transcript of the Public Meeting on Standards for Furnaces and Boilers held in Washington, DC, 9/29/2004, which is document number 59.8 in the docket of this rulemaking. This particular notation refers to a comment (1) by the American Council for an Energy-Efficient Economy (ACEEE), (2) in the document number 59.8 in the docket of this rulemaking (maintained in the Resource Room of the Building Technologies Program), and (3) appearing on page 36 of document number 59.8.

As discussed in the 2004 ANOPR, the Department has determined that EPCA does not authorize DOE to set regional energy conservation standards; instead, the Department can only establish national standards. 69 FR 45419. None of the comments received in response to the 2004 ANOPR provided a basis for changing that determination.

However, the Department notes that EPCA allows states to seek from the Department a waiver of Federal preemption of state or local energy conservation standards. Section 327(d) of EPCA, “Waiver of Federal Preemption,” states that, “Any State * * * with a State regulation which provides for any energy conservation standard * * * for any type * * * of covered product for which there is a Federal energy conservation standard * * * may file a petition with the Secretary requesting a rule that such State regulation become effective with respect to such covered product.” (42 U.S.C. 6297(d)(1)(A)) Within a maximum of one year, DOE must act on any such petition. (42 U.S.C. 6297(d)(2))

The Department must prescribe a rule granting a waiver from Federal preemption if, subject to the condition specified in section 327(d), the State establishes by a preponderance of the evidence that its regulation is needed to meet “unusual and compelling State or local energy * * * interests.” (42 U.S.C. 6297(d)(1)(B)) The statute states that the phrase “unusual and compelling State or local energy * * * interests” means interests which:

(i) Are substantially different in nature or magnitude than those prevailing in the United States generally; and (ii) are such that the costs, benefits, burdens, and reliability of energy * * * savings resulting from the State regulation make such regulation preferable or necessary when measured against the costs, benefits, burdens, and reliability of alternative approaches to energy * * * savings or production, including reliance on reasonably predictable market-induced improvements in efficiency of all products subject to the State regulation.

The factors described in clause (ii) shall be evaluated within the context of the State's energy plan and forecast, and, with respect to a State regulation for which a petition has been submitted to the Secretary * * * [42 U.S.C. 6297(d)(1)(c)]

In evaluating the evidence that a State regulation is needed to meet unusual and compelling State energy interests, the Department will consider the factors described in 42 U.S.C. 6297(d)(1)(C)(i) and (ii). It appears to the Department that in the context of residential furnaces and boilers, where regional climatic effects can have significant impact on whether a specified energy conservation standard would be technologically feasible and economically justified in that region, such regional climatic effects will be important in DOE's assessment of whether there are “unusual and compelling State or local energy interests” for State energy conservation standards. States having higher-than-average, population-weighted heating degree days (HDDs) based on long-term National Oceanic and Atmospheric Administration data

6

would seem to have the best prospects for demonstrating “unusual and compelling” interests to support a waiver of preemption in the particular circumstances presented here.

7

(In conducting its analysis, the Department used average heating degree days within a State to divide States into groups for purposes of assessing standards.) States with significantly higher heating requirements have significantly higher furnace use. This may indicate that, for

those States, a State energy conservation standard which is higher than the Federal standard would be cost-effective and would provide significantly more energy savings than the Federal standard. If those States, particularly the ones most severely affected, adopted standards higher than DOE's proposed standards, and sought waivers, it could result in certain contiguous States with higher requirements, which would lessen the impact on manufacturers.

6

State, Regional, And National Monthly Heating Degree Days Weighted By Population (2000 Census), 1971—2000 (and previous normal periods).

Historical Climatography Series No. 5-1. National Environmental Satellite, Data, and Information Service, National Oceanic and Atmospheric Administration. Available at:

http://www5.ncdc.noaa.gov/climatenormals/hcs/HCS_51.pdf.

7

Nationwide, the U.S. averages 5528 HDDs. The following States average 6000 or more HDDs: Alaska, Colorado, Connecticut, Idaho, Illinois, Iowa, Maine, Massachusetts, Michigan, Minnesota, Montana, Nebraska, New Hampshire, New York, North Dakota, South Dakota, Utah, Vermont, Wisconsin, and Wyoming.

Another way to address the benefits and costs of proposed State regulations with higher energy conservation standards would be for a State in its application for a waiver of preemption to identify the saturation of homes with products that already meet those higher standards. For example, a State could provide evidence that a significant percentage of gas furnaces sold today in that State already meets, for example, a 90-percent-AFUE condensing standard.

A State applying to DOE for a preemption waiver also could identify any subsidies and/or incentives, such as tax rebates or purchase price rebates, that the State or other entities are offering. To the extent States demonstrate that these programs have not worked, they may be able to show that “the costs, benefits, burdens, and reliability” of energy savings from mandatory State energy conservation regulations make such regulations preferable to their voluntary programs.

EPCA section 327(d)(3) further provides that DOE may not grant a waiver if interested persons establish by a preponderance of the evidence that the State regulation would significantly burden manufacturing, marketing, distribution, sale, or servicing of the covered product on a national basis. (42 U.S.C. 6297(d)(3)) In determining whether the State regulation meets this criterion, the Department must consider the extent to which the State regulation addresses several factors.

The first factor is “the extent to which the State regulation will increase manufacturing or distribution costs of manufacturers, distributors, and others * * *.” (42 U.S.C. 6297(d)(3)(A)) In addressing this factor, a State seeking a waiver of federal preemption likely would want to address the extent to which manufacturers already produce and sell products that would meet the State's proposed standard. This description also could include information describing how efficiencies of shipments to that State already vary from current DOE efficiency levels.

The second factor is “the extent to which the State regulation will disadvantage smaller manufacturers, distributors, or dealers or lessen competition in the sale of the covered product in the State * * *.” (42 U.S.C. 6297(d)(3)(B)) Similar to the prior factor, in addressing this factor, a State seeking a waiver of federal preemption might wish to provide evidence with its petition that demonstrates that there are no, or just insignificant, differences between small and large manufacturers with respect to producing and selling furnaces in that State. A State also could offer other evidence as to why its regulation would not disadvantage these entities or lessen competition, based on the particular circumstances in that State. For example, a State could seek to demonstrate that the differences (or lack of differences) between small and large manufacturers, with respect to producing and selling furnaces in that State, indicate that the regulation would not disadvantage the smaller manufacturers.

The third factor is “the extent to which the State regulation would cause a burden to manufacturers to redesign and produce the covered product type * * *, taking into consideration the extent to which the regulation would result in a reduction (i) in the current models, or in the projected availability of models, that could be shipped on the effective date of the regulation to the State and within the United States; or (ii) in the current or projected sales volume of the covered product type * * * in the State and the United States * * *.” (42 U.S.C. 6297(d)(3)(c)) In addressing this factor, a State seeking a waiver of federal preemption might seek to demonstrate that high-efficiency heating equipment, such as condensing furnaces, already have achieved significant market shares in that State. In some relatively cold States with significant heating requirements, sales of condensing furnaces are reported to be on the order of 50 percent. A State also might wish to submit other information that addresses why it believes its regulation would not affect sales volumes or the number of models available (except for elimination of lower efficiency models).

The fourth factor is “the extent to which the State regulation is likely to contribute significantly to a proliferation of State appliance efficiency requirements and the cumulative impact such requirements would have.” (42 U.S.C. 6297(d)(3)(D)) In addressing this factor, a State seeking a waiver from DOE may wish to seek to demonstrate, for example, the extent to which it has chosen identical standard levels as other States that have developed proposed regulations or States that have regulations already in place.

An additional factor DOE must consider is the extent to which “the State regulation is likely to result in the unavailability in the State of any covered product type * * * of performance characteristics (including reliability), features, sizes, capacities, and volumes that are substantially the same as those generally available in the State * * *.” (42 U.S.C. 6297(d)(4)) A State seeking preemption waiver may wish to explain in its petition or accompanying documents why it believes its regulation would not affect the characteristics and features (other than efficiency) of the furnaces that would be offered for sale in that State. It might seek to demonstrate, for example, that among products currently offered for sale in that or other States, high efficiency furnaces already have all of the characteristics and features available in less efficient furnaces sold in that State.

The Department recognizes that States have set, or are considering, standards for furnaces and that some may wish to seek a determination from DOE that their standards are needed to meet “unusual and compelling State or local energy interests.” The Department encourages States to coordinate among themselves the submission of any waiver petitions they may wish to file. The Department will consider an aggregate petition from multiple States as long as the petition individually addresses the statutory criteria for each of the States. The Department believes the approach taken in evaluating the regional impacts of standards in its analysis represents a reasonable approach for estimating the national impacts of having a Federal standard and one or more higher State energy conservation standards for furnaces and boilers. All petitions for waivers also must comply with requirements as described in 10 CFR Part 430.41(a)(1).

B. Test Procedures

Section 7(b) of the Process Rule provides that the Department will propose necessary modifications to the test procedures for a product before issuing the proposed rule concerning energy conservation standards for that product. For furnaces and boilers, the Department believes modifications are not currently necessary, so it has not proposed to modify the existing test procedure.

C. Technological Feasibility

1. General

The Department considers a design option to be technologically feasible if it is in use by the respective industry or

if research has progressed to the development of a working prototype. The Process Rule sets forth a definition of technological feasibility as follows: “Technologies incorporated in commercial products or in working prototypes will be considered technologically feasible.” 10 CFR part 430, Subpart C, Appendix A, section 4(a)(4)(i).

In each standards rulemaking, the Department conducts a screening analysis, which it bases on information gathered regarding existing technology options and prototype designs. In consultation with manufacturers, design engineers, and other stakeholders, the Department develops a list of design options for consideration in the rulemaking. Once the Department has determined that a particular design option is technologically feasible, it further evaluates each design option in light of the other three criteria in the Process Rule. 10 CFR part 430, Subpart C, Appendix A, section 4(a)(3) and (4). The three additional criteria are: (a) Practicability to manufacture, install, and service, (b) adverse impacts on product utility or availability, or (c) health or safety concerns that cannot be resolved. All design options that pass these screening criteria are candidates for further assessment.

As discussed in the 2004 ANOPR, the Department is not considering the following design options because they do not meet one or more of the screening criteria: self-generation of electric power, fuel-driven heat pumps, flue-gas recirculation, and smart valves. 69 FR 45387. In this notice, DOE has not changed the list of technology options that it screened out of the analysis. (See the Technical Support Document (TSD) accompanying this notice, Chapter 4.)

Lennox, Carrier, Trane, York, NPGA, Alagasco, and MHI commented that the maximum efficiency level considered for non-condensing, non-weatherized gas furnaces should be 80-percent AFUE. They contended that, at 81-percent AFUE, there would be a significant increase of risk to the consumer because of an increased potential for vent-system failure. These comments cited concerns regarding corrosion in vents from condensation, and noted that conditions under which consumers use the product are much more severe than lab conditions. (Lennox, Public Meeting Transcript, No. 59.8 at p. 27 and No. 79 at p. 1; Carrier, Public Meeting Transcript, No. 59.8 at p. 188 and No. 68 at p. 1; Trane, Public Meeting Transcript, No. 59.8 at p. 227; York, No. 65 at p. 7; NPGA, No. 72 at p. 3; Alagasco, No. 82 at p. 2; and MHI, No. 89 at p. 4) NAIMA, OCC, and NJBPU disagreed with limiting consideration to an 80-percent-AFUE level. (NAIMA, No. 60 at p. 1; OCC, No. 70 at p. 5; and NJBPU, No. 83 at p. 2) The Department has reviewed the manufacturer literature and found that products at 81-percent AFUE are available for sale. It believes the fact that such products are being offered for sale demonstrates that they are practicable to manufacture, install, and service and cannot be excluded from consideration in this rulemaking.

The Department recognizes that this AFUE level of 81 percent may pose health or safety concerns in certain conditions, but it believes that the concerns can likely be resolved with proper equipment and venting system design, as discussed in section IV.B.3. Therefore, DOE considered 81-percent AFUE in its analysis for non-weatherized gas furnaces, and took into account the stakeholders' concerns.

The 2004 ANOPR analysis included non-weatherized gas furnaces at 82 and 83-percent AFUE. However, because it is well understood that significant vent system corrosion problems, which can lead to potential safety issues, may exist at these efficiency levels for non-weatherized gas furnaces, the Department does not believe these products can be mass-produced and be reliable to install and service on the scale necessary to serve the relevant market by the effective date of the proposed standard. Therefore, DOE did not consider non-weatherized gas furnaces at 82 and 83-percent AFUE in the analysis for today's proposed rule.

The evaluated technologies all have been used (or are being used) in commercially available products or working prototypes. The designs all incorporate materials and components that are commercially available in today's furnace and boiler supply market. The Department believes all of the efficiency levels evaluated in this notice are technologically feasible.

2. Maximum Technologically Feasible Levels

In developing today's proposed rule, the Department followed the provisions of section 325(p)(2) of the Act, which states that, when the Department proposes to adopt, or to decline to adopt, an amended or new standard for each type (or class) of covered product, “the Secretary shall determine the maximum improvement in energy efficiency or maximum reduction in energy use that is technologically feasible * * * .” The Department determined the maximum technologically feasible (“max tech”) efficiency level in the engineering analysis using the most efficient design parameters that lead to the creation of the highest equipment efficiencies achievable. (See TSD Chapter 6.) Table III.1 lists the max tech levels that the Department determined for this rulemaking.

Table III.1.—Max Tech Levels Considered in Furnace and Boiler Rulemaking

Product class

AFUE

(%)

Non-weatherized gas furnaces

96

Weatherized gas furnaces

83

Mobile home gas furnaces

90

Oil-fired furnaces

85

Gas boilers

99

Oil-fired boilers

95

For all product classes, products with these efficiency levels already are being sold in small quantities. (There is one weatherized gas furnace listed in the GAMA directory at 82.8-percent AFUE.) No production models or prototypes of equipment at higher efficiency levels are currently available. For weatherized gas furnaces, the Department recognizes that the 83-percent-AFUE level may pose health or safety concerns in certain installations. DOE believes these concerns can be resolved with proper equipment and system design and proper installation.

D. Energy Savings

1. Determination of Savings

The Department used its national energy savings (NES) spreadsheet to estimate energy savings from amended standards for furnaces and boilers. (The NES Spreadsheet Model is described in section IV.D of this notice.) The Department forecasted energy savings over the period of analysis (beginning with 2015, the year that amended standards would go into effect, and ending in 2038) for each trial standard level, relative to the base case. It quantified the energy savings attributable to amended energy conservation standards as the difference in energy consumption between the standards case and the base case. The base case represents the forecast of energy consumption in the absence of amended energy conservation standards. The base case considers market demand for more-efficient products; for example, in the case of non-weatherized gas furnaces, the base case forecasts an increase in the market share of condensing furnaces by 2015.

The NES Spreadsheet Model calculates the electricity savings in “site energy” expressed in kilowatt-hours

(kWh). Site energy is the energy directly consumed on location by the furnace or boiler. The Department reports national energy savings in terms of the source energy savings, which is the savings of the energy that is used to generate and transmit the energy consumed at the site. (See TSD, Chapter 10.) The Department derived these conversion factors, which change with time, from the EIA's

AEO2005.

8

8

The Department conducted an energy price sensitivity analysis using EIA's

AEO2006.

Section IV.C.4 provides further explanation and details of the energy price sensitivity analysis.

AGA commented that DOE should consider the “rebound effect” that may occur as a result of more intensive use of a more energy-efficient appliance, leading to higher energy consumption. (AGA, No. 54 at p. 3) ACEEE stated that the rebound effect has often been hypothesized, but actual field experience indicates that there is rarely a rebound effect resulting from use of more-efficient appliances. (ACEEE, No. 84 at p. 13)

The Department examined a summary of the literature regarding the rebound effect in relation to space heating equipment.

9

Based on five studies chosen for their robust methodology, the summary concluded that, for a 100 percent increase in fuel efficiency, values of “take-back” or rebound for space heating are between 10 and 30 percent of the energy consumption savings. The National Energy Modeling System (NEMS), which is used for developing EIA's

AEO

, incorporates a rebound effect for space heating. According to an EIA report,

10

the rebound effect for the residential module in NEMS results in a 0.15 percent increase in energy consumption for a 1 percent increase in efficiency. In keeping with EIA's approach, the Department chose to apply a rebound effect of 15 percent (for a 100 percent increase in efficiency) in its analysis of furnace and boiler standards. That is, DOE reduced the calculated energy savings and associated emissions reductions by 15 percent.

9

Greening, L.A., D.L. Greene, and C. Difiglio. Energy efficiency and consumption—the rebound effect—a survey. Energy Policy. 2000. 28: pp. 389-401.

10

EIA, Price Responsiveness in the

AEO2003

NEMS Residential and Commercial Buildings Sector Models (p. 3).

The take-back in energy consumption associated with the rebound effect provides consumers with increased value (

e.g.,

a warmer indoor environment, since the increased efficiency enables consumers to use their heating equipment more intensively). The impact on consumers is thus the sum of the change in the cost of owning the heating equipment (

i.e.,

life-cycle cost) and the increased value for the warmer indoor environment. However, the Department is unable to monetize this increase in consumer value in the LCC analysis. The Department believes that, if it were able to monetize the increased value to consumers added by the rebound effect, this value would be at least as great as the value of the foregone energy savings. For this analysis, the Department estimates that this value is equivalent to the monetary value of the energy savings that would have occurred without the rebound effect. Therefore, the economic impacts on consumers with or without the rebound effect, as measured in the LCC and NPV analyses, are the same.

2. Significance of Savings

Section 325 of the Act prohibits the Department from adopting a standard for a product if that standard would not result in “significant” energy savings. (42 U.S.C. 6295(o)(3)(B)) While the Act does not define the term “significant,” the U.S. Court of Appeals, in

Natural Resources Defense Council

v.

Herrington,

768 F.2d 1355, 1373 (D.C. Cir. 1985), indicated that Congress intended “significant” energy savings in this context to be savings that were not “genuinely trivial.” The energy savings for energy conservation standards at each of the trial standard levels considered in this rulemaking are nontrivial, and therefore the Department considers them “significant” within the meaning of section 325 of the Act.

E. Economic Justification

1. Specific Criteria

As noted earlier, EPCA provides seven factors to be evaluated in determining whether an energy conservation standard is economically justified. (42 U.S.C. 6295(o)(2)(B)) The following sections discuss how the Department has addressed each of those seven factors in this rulemaking.

a. Economic Impact on Manufacturers and Consumers.

The Process Rule established procedures, interpretations, and policies to guide the Department in the consideration of new or revised appliance energy conservation standards. The provisions of the rule have direct bearing on the implementation of the manufacturer impact analysis (MIA). First, as provided in Section 10 of the Process Rule (Principles for the Analysis of Impacts on Manufacturers), the Department uses an annual-cash-flow approach in determining the quantitative impacts of a new or amended standard on manufacturers. This includes both a short-term assessment, based on the cost and capital requirements during the period between the announcement of a regulation and the time when the regulation becomes effective, and a long-term assessment. The impacts analyzed include INPV, cash flows by year, changes in revenue and income, and other measures of impact, as appropriate. Second, the Department analyzes and reports the impacts on different types of manufacturers, with particular attention to impacts on small manufacturers. Third, the Department considers the impact of standards on domestic manufacturer employment, manufacturing capacity, plant closures, and loss of capital investment. Finally, the Department takes into account cumulative impacts of different DOE regulations on manufacturers.

For consumers, measures of economic impact include the changes in LCC and payback period for each trial standard level. As the Act sets forth, the LCC is one of the seven factors to be considered in determining economic justification. (42 U.S.C. 6295(o)(2)(B)(i)(II)) It is discussed in detail in the section below.

ODOE commented that the simple payback period is not a useful metric, since it fails to take into account the rising costs of fuel. (ODOE, No. 61 at p. 10) The Department uses simple-payback-period results as one of the factors in evaluating the economic impacts of standards on consumers, but it relies more heavily on the impacts on LCC to take into account the changing cost of fuel.

b. Life-Cycle Costs.

The LCC is the sum of the purchase price of equipment, including the installation, and the operating expense, including energy and maintenance expenditures, discounted over the lifetime of the equipment. Where possible in estimating the energy costs in the LCC calculation, DOE uses consumer marginal energy rates, which are the energy rates that correspond to incremental changes in energy use.

For each furnace and boiler product class, the Department calculated both LCC and LCC savings for various efficiency levels. The LCC analysis estimated the LCC for representative equipment in housing units that are representative of the segment of the U.S. housing stock that uses furnaces and boilers. To account for uncertainty and variability in specific inputs, such as equipment lifetime and discount rate, it used a distribution of values with probabilities attached to each value. For each housing unit, DOE sampled the values of these inputs from the probability distributions. As a result, the

analysis produced a range of LCCs. A distinct advantage of this approach is that DOE can identify the percentage of consumers achieving LCC savings or attaining certain payback values due to an increased energy conservation standard, in addition to the average LCC savings or average payback for that standard. The Department gives the LCC savings as a distribution, with a mean value and a range. The Department assumed in its analysis that the consumer purchases the furnace or boiler in 2015.

c. Energy Savings.

While significant conservation of energy is a separate statutory requirement for imposing an energy conservation standard, the Act 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)) The Department used the NES Spreadsheet results in its consideration of total projected savings.

d. Lessening of Utility or Performance of Products.

In establishing classes of products, and in evaluating design options and the impact of potential standard levels, the Department aimed to develop standards for residential furnaces and boilers which would not lessen the utility or performance of the products under consideration in this rulemaking. (42 U.S.C. 6295(o)(2)(B)(i)(IV)) None of the considered trial standard levels would reduce the utility or performance of furnaces and boilers. The efficiency levels considered in this rulemaking do not involve changes in equipment design or unusual installation requirements that could reduce the utility or performance of furnaces and boilers.

e. Impact of Any Lessening of Competition.

The Act directs the Department to consider any lessening of competition that is likely to result from standards. It directs the Attorney General to determine the impact, if any, of any lessening of competition likely to result from a proposed standard and to transmit such determination to the Secretary, not later than 60 days after the publication of a proposed rule, together with an analysis of the nature and extent of such impact. (42 U.S.C. 6295(o)(2)(B)(i)(V) and (B)(ii)) The Department has transmitted a copy of today's proposed rule to the Attorney General and has requested that the Department of Justice (DOJ) provide its determination on this issue.

f. Need of the Nation To Conserve Energy

. The non-monetary benefits of the proposed standard are likely to be reflected in improvements to the security and reliability of the Nation's energy system—namely, reductions in the overall demand for energy will result in reduced costs for maintaining reliability of the Nation's electricity system. The Department conducts a utility impact analysis to estimate how standards may impact the Nation's needed power generation capacity. This analysis captures the effects of efficiency improvements on furnace electricity consumption, as well as impacts associated with the market shift from natural gas heating to electric heating that DOE estimates will occur at higher gas-furnace efficiency levels. This market shift more than offsets the electricity savings from more efficient furnace designs, resulting in an increase in projected generating capacity for the higher trial standard levels.

The Department has determined that the energy conservation standards proposed today would result in reductions in greenhouse gas emissions. The Department quantified a range of primary energy conversion factors and estimated the emissions reductions associated with the generation displaced by the energy conservation standards. The Department reports the environmental effects of amended energy conservation standards at each trial standard level for this equipment in the TSD environmental assessment.

g. Other Factors

. The Act allows the Secretary of Energy, in determining whether a standard is economically justified, to consider any other factors the Secretary deems to be relevant. (42 U.S.C. 6295 (o)(2) (B)(i)(VII)) Under this provision, the Department considered the potential for furnace and boiler standards to pose public health risks due to carbon monoxide release into the home as a result of venting system failure.

2. Rebuttable Presumption

As set forth in section 325(o)(2)(B)(iii) of EPCA, 42 U.S.C. 6295(o)(2)(B)(iii), there is a rebuttable presumption that an energy conservation standard is economically justified if the increased installed 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. However, although the Department examined the rebuttable-presumption criteria, it determined economic justification for the proposed standard levels through a more detailed analysis of the economic impacts of increased efficiency as described above, pursuant to section 325(o)(2)(B)(i) of EPCA. (42 U.S.C. 6295(o)(2)(B)(i)) The rebuttable presumption payback calculation is discussed in section IV.B.5 of this notice.

IV. Methodology and Discussion of Comments

The Department used spreadsheet models to meet certain objectives of the Process Rule for this rulemaking. It used the Engineering Spreadsheet to develop the relationship between cost and efficiency for furnaces and boilers and to calculate the simple payback for the purposes of satisfying the rebuttable payback requirements. The LCC Spreadsheet calculates the consumer benefits and payback periods for amended energy conservation standards. The National Impact Analysis Spreadsheet provides shipments forecasts and then calculates NES and NPV impacts of potential amended energy conservation standards. The Department also assessed manufacturer impacts, largely through the use of the Government Regulatory Impact Model (GRIM).

Additionally, DOE estimated the impacts of residential furnace and boiler energy conservation standards on utilities and the environment. The Department used a version of EIA's NEMS for the utility and environmental analyses. The NEMS model simulates the energy economy of the U.S. and has been developed over several years by the EIA primarily for the purpose of preparing the

AEO

. The NEMS produces forecasts for the U.S. that are available in the public domain. The version of NEMS used for appliance standards analysis is called NEMS-BT, and is primarily based on the

AEO2005

version with minor modifications.

11

The NEMS offers a sophisticated picture of the effect of standards, since it accounts for the interactions between the various energy supply and demand sectors and the economy as a whole.

11

The EIA approves the use of the name NEMS to describe only an

AEO

version of the model without any modification to code or data. Because the present analysis entails some minor code modifications and runs the model under various policy scenarios that deviate from

AEO

assumptions, the name NEMS-BT refers to the model as used here. For more information on NEMS, refer to The National Energy Modeling System: An Overview. DOE/EIA-0581 (98), February, 1998. BT is DOE's Building Technologies Program. NEMS-BT was formerly called NEMS-BRS.

The Department invites comments on the validity of the analytical methods used in this rulemaking and the appropriateness of the interpretation and use of the results of the analysis.

A. Product Classes

For this rulemaking, the Department initially considered the product classes

discussed in the 1993 ANOPR. In 1987, the Act set the initial Federal energy conservation standard, which covered furnaces, boilers, mobile home furnaces, and “small” furnaces. In the 1993 ANOPR, the Department expanded the product classes to differentiate fuel type, heat transfer medium (

i.e.

, hot water or steam for boilers), and outdoor and indoor installation suitability (

i.e.

, weatherized or non-weatherized). Table IV.1 lists the product classes DOE initially considered in this rulemaking.

Table IV.1.—Product Classes Considered in Furnace and Boiler Rulemaking

Product

Characteristics

Gas furnaces

Non-weatherized and weatherized.

Oil-fired furnaces

Non-weatherized and weatherized.

Mobile home furnaces

Gas and oil-fired.

Electric resistance furnaces

Electric.

Hot water boilers

Gas and oil-fired.

Steam boilers

Gas and oil-fired.

Based on the market assessment and stakeholder comments, the Department grouped the product classes into three categories for the analysis for today's proposed rule. The first category consists of the most widely used product class, non-weatherized gas furnaces.

The second category consists of those classes that have fewer shipments, but typically more than 100,000 per year: Weatherized gas furnaces, mobile home gas furnaces, non-weatherized oil-fired furnaces, hot-water gas boilers, and hot-water oil-fired boilers. The Department's analysis of these product classes was similar to its analysis of non-weatherized gas furnaces.

The third category includes product classes for which DOE did not perform analyses and is not proposing an amendment to the current standards for these products. This category includes steam gas boilers and steam oil-fired boilers, which have annual shipments below 40,000 units and show a declining trend of shipments. This category also includes weatherized oil-fired furnaces, mobile home oil-fired furnaces, and electric furnaces. Weatherized oil-fired furnaces and mobile home oil-fired furnaces have very low shipments and are represented by only a few models in the GAMA directory; promulgating a higher standard for these products would result in

de minimis

energy savings. Additionally, all of the GAMA-listed models for weatherized oil-fired furnaces and mobile home oil-fired furnaces exceed the current 78-percent-AFUE standard. Therefore, for these classes, DOE is not proposing an update of the existing standard. The Department did not consider electric furnaces since their efficiency approaches 100-percent AFUE and improvements to them would also have

de minimis

energy-savings potential. Therefore, for electric furnaces, DOE is not proposing a standard.

B. Engineering Analysis

The purpose of the engineering analysis is to characterize the relationship between efficiency and cost of furnaces and boilers. The Department used this efficiency/cost relationship as input to the payback period, LCC, and NES analyses.

The engineering analysis develops data that can be used to establish the consumer price of more-efficient equipment. These data include manufacturing costs, markups, installation costs, and maintenance costs.

To generate the manufacturing costs, the Department identified three basic methodologies: (1) The design-option approach, which provides the incremental costs of adding design options to a baseline model that will improve efficiency; (2) the efficiency-level approach, which provides the incremental costs of moving to higher energy-efficiency levels, without regard to the particular design option(s) used to achieve such increases; and (3) the cost-assessment (or reverse-engineering) approach, which provides “bottom-up” manufacturing cost assessments for achieving various levels of increased efficiency, based on detailed data on costs for parts and material, labor, shipping/packaging, and investment for models that operate at particular efficiency levels.

The Department began the manufacturing cost analysis by exploring how manufacturers would likely design products to perform at the various efficiency levels considered and to thoroughly understand the relationships between different equipment configurations and efficiency. The Department initially considered several design options that could meet each considered efficiency level. It selected the design option(s) it believed manufacturers would most likely implement to achieve a given considered energy efficiency level. To estimate the manufacturing costs of these design options, the Department relied primarily on the cost-assessment (or reverse-engineering) approach, but also used the design-option approach.

To compare the total additional consumer cost of improved equipment efficiency, the Department defined a baseline design for each product class. The baseline model establishes the starting point for analyzing technologies that provide energy-efficiency improvement. Based on its market assessment and input provided by GAMA, the Department defined a baseline model as an appliance with an efficiency at the minimum level prescribed by EPCA (

i.e.

, 78-percent AFUE for non-weatherized gas furnaces), and having commonly available features and technologies.

The Department next determined markups, installation cost, and maintenance cost to complete the engineering analysis. It estimated markups using publicly available corporate and industry data and, for mobile home furnaces, data from MHI. To estimate installation costs, DOE created an Installation Model to assess venting costs, and verified it against known existing data. It estimated maintenance costs using publicly available industry data.

Table IV.2 summarizes the approach and data DOE used to derive the inputs to the engineering analysis for the 2004 ANOPR analysis, and the changes made in the analysis for today's proposed rule. Discussion of the changes follows in the sections below.

Table IV.2.—Approach and Data Used To Derive the Inputs to the Engineering Analysis

Input

2004 ANOPR analysis

Proposed rule analysis

Equipment Cost

For the most widely used efficiency levels, used a cost model of manufacturing costs created by tear-down analysis; for the remaining levels, used design-opinion analysis. Incorporated industry feedback from GAMA and individual manufacturers to generate manufacturing-cost-versus-efficiency curves

Added cost of drip pan for condensing units. Some units omit a combustion air pipe. Updated underlying metal and cost data to 2004 via Consumer Price Index. Did not consider design options at 82-percent and 83-percent AFUE for non-weatherized gas furnaces due to potential safety hazards. Updated manufacturing-cost-versus-efficiency curves.

Markups

Derived markups from an analysis of corporate financial data. Multiplied manufacturing costs by manufacturer, distributor, contractor, and builder markups, and sales tax, as appropriate, to get equipment price

No change.

Installation Cost

Used a distribution of weighted-average installation costs from the Installation Model. Installation configuration are weight-averaged by frequency of occurrence in the field, and vary by installation size. The Installation Model is based on a commonly used cost-estimation method and is comparable to available, known data

Same method; new assumption that all 81-percent AFUE gas furnaces use double wall vents.

Maintenance Costs

Used Gas Research Institute data for gas furnaces and boilers, water heater rulemaking survey results for oil-fired equipment, and data from the 1993 rulemaking for mobile home furnaces

Same sources, but accounted for higher maintenance frequency for modulating design option, and used same costs for condensing and non-condensing equipment.

Annual Energy Use*

Calculated energy use using the DOE test procedure.**

No change.

Energy Prices*

AEO2003

forecast prices for year 2012

AEO2005

forecast prices for effective date of 2015.

* Inputs required to calculate rebuttable-presumption payback period. For more details on the rebuttable-presumption payback period, refer to section IV.B.5.

** The Department uses field-representative energy use values in the LCC and payback period analysis. Refer to section IV.C.3. for more details.

The Department received comments concerning the efficiency levels it should consider in the engineering analysis.

GAMA and Rheem expressed concern about producing an entire family of gas furnaces at 81-percent AFUE and suggested that, for some, and not all, furnace models within a given family, it is possible to design and produce units that can safely perform at the 81-percent level. They indicated that developing a complete family of furnaces, spanning the full range of capacities, in which all units could safely operate at 81-percent AFUE, would be difficult due to confining design and manufacturing procedures. (GAMA, Public Meeting Transcript, No. 59.8 at p. 177; Rheem, Public Meeting Transcript, No. 59.8 at p. 179) In response to these comments, DOE conducted an analysis evaluating approaches necessary to manufacture a full line of product that can perform at 81-percent AFUE and the additional costs involved for producing such a family of furnaces.

To perform this analysis, the Department identified an approach to manufacturing an entire furnace family at 81-percent AFUE without posing unacceptable safety and reliability risks. The Department identified two potential cases for producing an entire family of 81-percent AFUE non-weatherized gas furnaces, and the additional per-unit cost associated with each case. The Department based the estimates for both cases on manufacturer-provided data, which an independent consultant reviewed. The first case, estimate case 1, includes SKU cost (Stock Keeping Unit and customization development cost), parts cost increases, and vent connector cost; case 2, in addition to the above costs, assumes that a heat exchanger redesign cost would be needed. The estimated additional per-unit cost for producing a family of furnaces that can achieve reliable, safe operation at 81-percent AFUE is $47.20 for case 1 (the default case) and $88.70 for case 2.

York asserted that DOE cannot set the proposed standard for mobile home furnaces above 80-percent AFUE, since section 325(o)(4) of EPCA, 42 U.S.C. 6295(o)(4), provides that DOE may not prescribe an amended standard if “the standard is likely to result in the unavailability in the United States of 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.” York also stated that there are no non-condensing mobile home furnaces currently available on the market that exceed 80-percent AFUE. Additionally, York stated that their interpretation of this EPCA provision also applies to 90-percent AFUE units for mobile home furnaces. (York, No. 65 at p. 7)

After considering the comments from York, DOE concluded that section 325(o)(4) of EPCA, 42 U.S.C. 6295(o)(4), does not require it to set a new or amended energy conservation standard either at an efficiency level currently available in the U.S., or at an efficiency level that would ensure all products meeting the standard would have all of the attributes of currently available products. The “performance characteristics” and “features” referred to in section 325(o)(4) of EPCA, 42 U.S.C. 6295(o)(4), do not include efficiency or energy-use levels. Rather, these terms refer to other types of product characteristics of concern to consumers, such as features affecting temperature control or user comfort. To

interpret section 325(o)(4) of EPCA, 42 U.S.C. 6295(o)(4), otherwise would bar DOE from ever prescribing higher minimum standard levels, because any such higher levels necessarily result in new energy-efficiency-improving technologies incorporated into the product and the unavailability of products including less efficient technologies. This interpretation would be inconsistent with EPCA's other provisions and its purpose of improving product efficiencies. Thus, the lack of currently available, non-condensing, mobile home furnaces above 80-percent AFUE does not mean that section 325(o)(4) of EPCA, 42 U.S.C. 6295(o)(4), bars DOE from adopting a level higher than that as a minimum standard for this product class. Thus, DOE believes that section 325(o)(4) of EPCA, 42 U.S.C. 6295(o)(4), does not preclude DOE from considering efficiencies for mobile home furnaces above a given level, such as 80-percent AFUE. As discussed in section III.C.2 above, DOE identified 90-percent AFUE as the maximum technologically feasible level for mobile home furnaces. The Department analyzed efficiency levels that include 80-percent and 90-percent AFUE for mobile home furnaces and the results are presented in section V.C.

1. Manufacturing Costs

The Department adjusted its engineering cost model based on cost data received from several individual manufacturers, and used the model to create new cost-efficiency curves for the industry. The Department then used these cost-efficiency curves as manufacturing cost inputs for the MIA. Details of the MIA are in Chapter 12 of the TSD.

Lennox, York, and GAMA commented that the cost of materials in the 2004 ANOPR TSD was outdated. (Lennox, Public Meeting Transcript, No. 59.8 at p. 66; York, No. 65 at p. 3; and GAMA, No. 67 at p. 6) For the 2004 ANOPR engineering analysis, reviewed by manufacturers, the Department used a five-year average of material prices from years 2000 through 2004. In response to various comments, the Department reviewed material-cost data from the first quarter of 2005 and found prices higher than those in the reference scenario that it used in the 2004 ANOPR analysis. Based on the more recent data, DOE updated the five-year average prices used in the analysis for this notice and conducted a material price sensitivity analysis with two additional material-price scenarios. The reference case uses a revised five-year average of material prices from years 2000 through 2004. The new prices of copper, aluminum, steel, and stainless steel reflect prices from the Bureau of Labor Statistics (BLS) Producer Price Indices (PPIs) spanning 2000-2004. The Department used the PPIs for copper rolling, drawing, and extruding, and for steel mill products, and adjusted them to 2004$ using the gross-domestic-product implicit-price deflator.

The Department created two scenarios for the material-price sensitivity analysis: a low-bound and a high-bound. It calculated the low-bound scenario by finding the lowest price per pound of M6 core steel between 2000 and 2004. The lowest price of M6 core steel on a per-pound basis occurred in 2002. Then, DOE applied a 15-percent reduction to each of the raw material costs in that same year. It used these prices to determine their effect on the cost-efficiency relationship. Likewise, DOE calculated the high-bound scenario using the average price for each of the raw materials from the first quarter of 2005, when prices of raw materials were uncharacteristically high. The Department evaluated the results of the material price sensitivity analysis, using all three material-cost scenarios, in the engineering analysis and then used them as inputs for the LCC analysis. The results for the material-price-sensitivity analysis are presented in Appendix Z of the TSD.

GAMA stated that DOE's cost estimate for modulating furnaces is about 30 percent too low because of faulty assumptions regarding the cost of upgrading the controls. (GAMA, No. 67 at p. 2) The Department reviewed its cost estimate for modulating furnaces. Based on market data, it determined that the cost of the components for the evaluated design (two-stage modulation) is slightly higher than the cost used in the ANOPR analysis. Consequently, the Department implemented this small change in price for the NOPR analysis.

Carrier stated that improving efficiency with modulation assumes maintaining constant excess air when switching from high fire to low fire. Carrier further stated that a brushless, direct-current (DC) draft inducer motor is required to maintain constant excess air, so DOE should include the cost of brushless, DC draft inducers in its analysis. (Carrier, Public Meeting Transcript, No. 59.8 at p. 181) To some extent, DOE did this in the analysis for the 2004 ANOPR. Current modulating furnaces have a two-stage motor for the draft inducer, and DOE included the cost of this motor in analyzing the cost of achieving that level of efficiency. The Department has revised its analysis for the proposed rule to account for the cost of the two-stage modulation design option components, including the cost of the draft inducer as advocated by Carrier, for all products that achieve higher efficiencies using modulation.

2. Markups

Using the cost data, DOE developed estimates of the consumer price of furnaces and boilers. To estimate prices, DOE determined typical markups at each stage of the distribution chain, from the manufacturer to the consumer. In addition to estimating average markups, the Department characterized the markups with probability distributions through a statistical analysis of U.S. Census data and used these distributions in the LCC analysis. (See TSD, Chapter 5.)

The Department estimated the manufacturer markup based on analysis of corporate financial records. It included the following expenses in the determination of the manufacturer markup: research and development (R&D), net profit, general and administrative costs, warranty expenses, taxes, and sales and marketing costs. It excluded shipping expenses (out-bound) because these expenses were included in the manufacturing cost. The Department determined R&D expenses by assuming that engineering budgets would be reallocated from value engineering and new-feature development to product development and redesign.

The Department based the wholesale and contractor markups on firm balance sheet data. It estimated builder markup (applied to new construction installations only) from U.S. Census data for the residential and commercial building construction industry and from heating, ventilating, and air-conditioning (HVAC) industry data. The Department used recent State and local sales tax data to estimate sales taxes (applied to replacement installations only).

For mobile home furnaces, the distribution chain is shorter than the distribution chains for other product classes. The heating equipment manufacturer sells to the manufactured housing maker, who installs the furnace at the factory. In this case, the Department estimated markups using information from MHI.

The overall markups are lower for new construction installations than for replacement installations. For wholesalers and contractors, the markup on incremental costs (

i.e.

, the costs over and above the costs for a baseline model) is lower than the markup on the baseline model cost. The reason is that only wholesalers' and contractors' profits and other operating costs

typically scale with the price they pay for the products they sell. Trane questioned the assumption that incremental markups should be lower than baseline markups. (Trane, Public Meeting Transcript, No. 59.8 at p. 147) AGA said that wholesalers, contractors, and builders will base markups not on incremental costs of the technology, but on the economic value of the product in the supply chain. (AGA, No. 78 at p. 4) The Department evaluated the markup chain and found that the markup on incremental costs is lower than the baseline markup for wholesalers and contractors, so the Department did not change its application of markups. (See TSD, Chapter 5.)

3. Installation Costs

The Department defines the installation cost as the expense to the consumer for professional installation of a furnace or a boiler. The installation cost is not part of the equipment's retail price. The cost of installation covers all labor and material costs associated with the installation of a new unit or the replacement of an existing one, excluding the cost of the unit itself. For furnaces and boilers, the installation cost is typically the largest single component of the total cost to the consumer and is greater than the equipment price.

The predominant part of the installation cost is the venting system. The American National Standards Institute (ANSI) standard Z21.47-1993 defines four furnace and boiler categories (I-IV) with respect to the venting system. The categories are defined based on the operating pressure and temperature of the combustion gases inside the vent. Most non-condensing equipment falls into Category I (high temperature, negative pressure). Most condensing equipment falls into Category IV (low temperature, positive pressure), but some non-condensing boilers are in Category III (high temperature, positive pressure). Category III venting requires stainless steel material (AL29-4C) and sealed joints.

The Department devoted considerable effort to identifying appropriate cost figures to use in its analysis. In the process, DOE found that there is no complete, up-to-date data source for installation costs for the product classes under consideration. Therefore, DOE developed its own Installation Model to determine installation costs for non-weatherized gas furnaces. The Department used RS Means, a well-known construction-cost-estimation method, to develop labor costs, and obtained quotes from national distributors to develop material costs. The Installation Model weight-averages the detailed costs for a large variety of typical installations in the field, including both new construction and retrofit installations; single and multifamily housing; plastic, metal, and masonry chimney vents; single- and double-wall vent connectors; and common venting with other appliances. Chimney relining practices and orphaned water heaters are explicitly modeled. The Department modified certain assumptions to apply the Installation Model to oil-fired furnaces and gas- and oil-fired boilers.

In their comments, Carrier, Lennox, Alagasco, and York addressed space constraints and other issues related to the cost of installing furnaces and boilers. Carrier stated that, in southern and western markets, many furnaces are installed in attics, and if the furnace is more than 21 inches wide, it will not fit into the attic through the attic access. (Carrier, Public Meeting Transcript, No. 59.8 at p. 51) Lennox asked that the installation analysis account for non-conventional installations of very large units. (Lennox, Public Meeting Transcript, No. 59.8 at p. 75) Lennox commented that, with regard to oil-fired furnaces, because of the larger heat exchangers, the physical size of the furnace cabinet can cause space constraint problems. (Lennox, No. 79 at p. 2) Alagasco stated that DOE's installation model underestimates costs associated with the installation of gas furnaces, especially for replacement markets. (Alagasco, No. 82 at pp. 1-2) Finally, York stated that, due to the large size of residences in some areas of the country, more than one furnace system may be installed in a dwelling, and installing or changing multiple systems has a different cost impact than changing or installing a single system. (York, Public Meeting Transcript, No. 59.8 at p. 74) The Department's Installation Model includes a wide variety of installation situations, as mentioned above, and accounts for most situations where space constraints may be an issue.

a. Non-Weatherized Gas Furnaces.

In the 2004 ANOPR, DOE estimated that eight percent of all installations of non-weatherized gas furnaces at 81-percent AFUE will require Category III venting. It based this estimate on the fact that if the steady-state efficiency of a non-condensing furnace exceeds 83 percent, it must be vented with a Category III venting system to prevent condensation problems. The Department arrived at the eight-percent value by considering the difference between the steady-state efficiency and the AFUE for actual models, based on the model information listed in the GAMA directory. Carrier and Lennox commented that the Department did not appropriately account for the fraction of 81-percent-AFUE furnaces that would require Category III venting and recommended that the eight-percent number be raised considerably. (Lennox, Public Meeting Transcript, No. 59.8 at p. 89 and No. 79 at p. 2; and Carrier, Public Meeting Transcript, No. 59.8 at p. 89) GAMA and Carrier stated that DOE's approach underestimates the fraction of Category III models because there is at least 0.5-percent difference between the steady-state efficiency as measured by the DOE test procedure and as measured in the ANSI Z21.47 categorization test. (The ANSI Z21.47 test is applied by manufacturers to identify venting categories to develop information for the manufacturers' installation manuals.) (GAMA, Public Meeting Transcript, No. 59.8 at p. 85 and No. 67 at p. 5; and Carrier, Public Meeting Transcript, No. 59.8 at p. 93 and No. 68 at p. 1)

In the analysis for this proposed rule, DOE did not directly estimate the fraction of Category III models by considering the difference between the steady-state efficiency and the AFUE for actual models. For this analysis, DOE investigated existing models and manufacturers' installation manuals. It determined that non-weatherized gas furnaces at 80- and 81-percent AFUE, when applied in vertical venting installations, fall into Category I. When 81-percent-AFUE furnaces replace 80-percent-AFUE furnaces, a significant fraction of installations requires an update from a single-wall to a Type-B, double-wall vent connector. In the case of replacement installations, the Department added the cost of a Type-B, double-wall vent connector to 40-percent of the installations. When applied in horizontal venting installations, furnaces at 80 and 81-percent AFUE are either in Category III or are in Category I using a power venter. The cost for these two venting methods is similar. Since horizontal installations account for a negligible fraction of all non-condensing furnace installations (estimated at less than 0.1-percent), DOE did not include this type of installation in its analysis.

Carrier, NPGA, and Lennox commented that lack of knowledge on the part of installers regarding proper installation practices for 81-percent-AFUE furnaces could result in incorrect installation and unsafe conditions for the consumer. (Carrier, Public Meeting Transcript, No. 59.8 at p. 83; NPGA, No. 72 at p. 4; and Lennox, No. 79 at p. 2) York and Alagasco stated that there are

issues regarding long-term safety, reliability, and performance of the Category III venting materials or systems available on the market today, and this is a major concern if thousands of installations across the country will require such systems. (York, No. 65 at p. 3; Alagasco, No. 82 at p. 2) Carrier, Rheem, and York commented that they do not offer Category III appliances, and stated that Category III venting is not used for 81-percent-AFUE models. (Carrier, Public Meeting Transcript, No. 59.8 at p. 115; Rheem, Public Meeting Transcript, No. 59.8 at p. 117; and York, No. 65 at p. 3) The Department recognizes the stakeholders' concerns. As discussed above, however, analysis for this proposed rule indicated that Category III venting would be required for a negligible fraction of installations of 81-percent-AFUE gas furnaces. Furthermore, based on the existing use of Category III venting, particularly for high-efficiency boilers, the Department believes that the relevant stainless steel materials (AL29-4C) would perform with an acceptable degree of safety and reliability for Category III furnaces.

The ODOE commented that the assumed overall cost for condensing furnace installation is too high, as it fails to account for the expected growth in the share of condensing furnaces that are for the replacement market, and the relatively small installation cost for replacing a condensing furnace. (ODOE, No. 61 at pp. 7-8) NRDC noted that installation costs will decline when replacement of 90-percent-AFUE furnaces becomes widespread. (NRDC, No. 528 at p. 4) The Department adjusted its estimate of installation costs for condensing furnaces to account for a higher share of replacements in total installations of condensing furnaces in 2015. With regard to the cost for replacing a condensing furnace, the Department did not find any new data to justify a change to the cost used in the 2004 ANOPR analysis.

AGA stated that installation costs for condensing furnaces are incompletely represented in the 2004 ANOPR, since installation codes require that condensing appliances be provided with an auxiliary drain pan to prevent damage to building components in the event of a blockage in the condensate drain piping system, and an estimated 40-percent of all condensing furnace installations need drain pans. (AGA, No. 78 at p. 5) The Department adjusted its Installation Model to account for the use of drain pans in 40 percent of condensing furnace installations.

In addition, the Department recognizes that some consumers may experience additional costs that exceed those used in the Department's analysis to address necessary structural changes for installing a condensing furnace, primarily for the vent systems associated with non-weatherized gas furnaces and for mobile home gas furnaces at or above 90-percent-AFUE. The Department understands that, for some dwellings, it may be necessary to make “structural” changes, such as the removal or penetration of an interior wall, exterior wall, or roof, to accommodate new vent systems (and combustion air intakes). While the Department has no data to quantify the number of consumers that may be affected in this manner and the cost magnitude, it believes the possible cost impacts may be significant enough to warrant consideration in evaluating the adoption of a standard level that would require condensing technology. The Department invites comments on the number of consumers that may be affected by structural changes for installing a condensing furnace and the cost magnitude of any structural changes.

b. Other Product Classes.

For weatherized gas furnaces, the Department estimated the installation cost for the baseline model using data from Section 400 of the 2002

RS Means Mechanical Cost Data.

The assumption that installation costs remain mostly constant as efficiency increases seems reasonable for single-package systems. The increases in size and weight for more-efficient systems are small relative to the large size and weight of the baseline model unit.

For mobile home gas furnaces in new homes, installation costs are part of the equipment cost because mobile home gas furnaces are assembled in the factory rather than in the field. The Department included these factory assembly costs in the manufacturer markup. With respect to mobile home gas furnaces for replacement, the Department did not find any new data to estimate an installation cost, so it used the same approach as for new-home furnaces.

York, GAMA, and MHI commented on venting issues related to mobile home furnaces. GAMA and York suggested that DOE did not sufficiently explore vent corrosion issues related to mobile home furnaces and weatherized furnaces in the 2004 ANOPR analysis. (GAMA, Public Meeting Transcript, No. 59.8 at p. 228; and York, No. 65 at p. 5) York, GAMA, and MHI noted that approved venting materials for Category III venting are not available for mobile home furnace installations. (York, No. 65 at p. 5; GAMA, No. 67 at p. 6; and MHI, No. 89 at p. 3) York also stated that condensation and resulting corrosion must be considered for weatherized furnaces, along with the cost impact of materials having more corrosion-resistant properties. (York, No. 65 at p. 8) GAMA agreed with DOE that it is appropriate not to include venting costs for weatherized products, but stated that there is a need to capture the increased likelihood of heat exchanger and flue corrosion resulting in premature failure. (GAMA, No. 67 at p. 6) In conducting its analysis for this notice, DOE reviewed the issue of vent corrosion for mobile home furnace installations and included a cost to account for proper venting system installation. For weatherized furnaces, the Department reviewed corrosion issues and found that current models having an AFUE of up to 82 percent do not have special requirements to address corrosion issues. Therefore, the Department did not change its cost estimates for this product class for this proposed rule.

For gas hot water boilers, the 2004 ANOPR analysis used a uniform assumption that 20-percent of installations would require Category III venting at 80-84-percent-AFUE levels. GAMA, ACEEE, and AGA commented that the analysis should include a gradually increasing share of Category III venting as the AFUE rises. (GAMA, Public Meeting Transcript, No. 59.8 at p. 111; ACEEE, Public Meeting Transcript, No. 59.8 at p. 113; and AGA, No. 78 at p. 5) GAMA asked that DOE's analysis use GAMA's data showing the fraction of gas hot water boiler models vented with Category III by efficiency level. (GAMA, Public Meeting Transcript, No. 59.8 at p. 107) AGA stated that manufacturers' installation instructions for a number of gas hot water boilers in the range of 83-84-percent AFUE do require Category III venting, and recommended that DOE consider these requirements. (AGA, No. 78 at p. 5)

In the analysis for today's proposed rule, DOE used data provided by GAMA on the fraction of installations at each efficiency level that would require Category III venting. The Department also conducted a sensitivity analysis using similar assumptions as in the 2004 ANOPR. This analysis reflected current construction practices, which use Category III venting for horizontal venting installations at all efficiency levels.

GAMA and ACEEE commented that DOE should further investigate installation practices for oil-fired equipment at various efficiency levels. (GAMA, Public Meeting Transcript, No. 59.8 at pp. 112 and No. 67 at p. 4; and ACEEE, No. 53 at p. 6) ACEEE stated

that DOE's analysis for oil systems does not fully account for the fact that exhaust from oil systems is generally at a higher temperature and has lower moisture content than exhaust from gas systems. (ACEEE, No. 84 at p. 11) Carrier urged DOE to perform vent condensation analyses on higher-efficiency oil furnace designs. (Carrier, No. 68 at p. 4)

The 2004 ANOPR analytical approach for oil-fired furnaces assumed that all installations of 83-percent-AFUE, or lower efficiency, equipment would be vented using Type L vents, and all installations of 84-percent-AFUE, or higher efficiency, equipment would be vented using 316-grade stainless steel vent systems. For this notice, the Department consulted Brookhaven National Laboratory and other experts, and also reviewed the National Fire Protection Association (NFPA) standards NFPA-31

Standard for the Installation of Oil-Burning Equipment

and NFPA-11

Standard for Chimneys, Fireplaces, Vents, and Solid Fuel-Burning Appliances.

The analysis for today's proposed rule has taken into consideration the NFPA-31 standard, which provides that Type L vents can be used safely with products of up to 88 percent, steady-state efficiency (or 87-percent AFUE), depending on the vent configurations and equipment size. The Department used a gradual increase in the number of 316-grade stainless steel vent installations from zero percent at 80-82-percent AFUE to 100-percent at 86-percent AFUE. The mid-point of the range is 50 percent at 84-percent AFUE. This assumption accounts for the NFPA-31 recommendations at the upper end of the range. The Department used a similar approach for oil-fired boilers, but shifted the above AFUE values upward by one AFUE efficiency point, in accordance with the NFPA-31 standard. The approach DOE used in this proposed rule accounts for the fact that exhaust from oil systems is generally at a higher temperature and has lower moisture content than exhaust from gas systems. It also addresses vent condensation on higher-efficiency, oil-fired furnace designs.

4. Maintenance Costs

Maintenance costs are the costs of regular maintenance of a furnace or boiler when it fails, including all associated labor and material costs. For non-weatherized and weatherized gas furnaces and gas boilers, in the 2004 ANOPR analysis, DOE used data on the cost and frequency of maintenance that were provided in the Gas Research Institute (GRI)-94/0175 topical report

Assessment of Technology for Improving the Efficiency of Residential Gas Furnaces and Boilers.

The Department used this information to estimate required minimum maintenance frequencies of once every five years for all equipment without modulation, and once every four years for all equipment with modulation, to account for the greater complexity of the modulation feature. For oil-fired furnaces and oil-fired boilers, DOE applied the results of a survey performed for its previous water heater rulemaking. For mobile home furnaces, DOE used data from the

Technical Support Document: Energy Efficiency Standards for Consumer Products, DOE/EE-0009,

published in November 1993. (See TSD, Chapter 6.)

The ODOE and York stated that the GRI data DOE used are outdated. (ODOE, No. 61 at p. 9; and York, No. 65 at p. 6) GAMA stated that maintenance costs should at least scale with the cost of the product, if not meet some other more rigorous assumption. (GAMA, Public Meeting Transcript, No. 59.8 at p. 165) ODOE commented that, unless DOE can provide data that support its contention that the maintenance costs vary proportionally to the efficiency of the furnace, using the same maintenance costs would be appropriate for all furnaces. (ODOE, No. 61 at p. 9) In its review of these comments, DOE confirmed that maintenance frequency, and therefore cost, does not necessarily vary with AFUE. Rather, the greater complexity of the modulation feature causes furnaces with this feature to require more frequent maintenance and thus incur higher maintenance costs.

The ODOE disagreed with how the 2004 ANOPR analysis represented maintenance costs for condensing equipment in terms of maintenance contracts. (ODOE, No. 61 at p. 9) In the 2004 ANOPR, DOE used a value for condensing equipment from the GRI report that represented the cost of a service contract that includes a specified set of routine repairs. In the analysis for this notice, the Department compared maintenance instructions for non-condensing and condensing gas furnaces from manufacturers' manuals, researched

RS Means

literature for maintenance differences between non-condensing and condensing gas furnaces, and collected opinions from several furnace installation and maintenance experts. It found, as asserted by ODOE, that annual maintenance contracts are not commonly applicable to condensing gas furnaces, and it did not find evidence of differences in maintenance requirements between condensing and non-condensing designs. Thus, in accordance with ODOE's comment, the Department used the same maintenance cost data for condensing and non-condensing furnaces, and it applied the same considerations to gas boilers.

5. Rebuttable-Presumption Payback Period

Section 325(o)(2)(B)(iii) of the Act 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))

The Department defines the rebuttable-presumption payback period as the length of time it takes the consumer to recover the higher installed cost of more-energy-efficient equipment through lowering operating costs. Numerically, the rebuttable-presumption payback period is the ratio of the increase in total installed cost (including the purchase price and installation cost) to the decrease in operating expenses (including maintenance). Energy expenses are the primary component of operating expenses. The Department determines the changes in total installed cost and operating expenses relative to the baseline for each product class (

i.e.,

the current standard level). Energy-expense savings are the first year's energy savings multiplied by the average energy prices forecast for the year in which a new standard is expected to take effect—in this case, the year 2015. The Department used energy price forecasts from the

AEO2005

to estimate the energy price in the year 2015.

12

To calculate energy-expense savings at each efficiency level, the Department uses the DOE test procedure for calculating annual energy consumption. (See TSD, Chapter 6.)

12

Although the Department conducted an energy price sensitivity analysis using

EIA's AEO2006,

it did not perform a sensitivity analysis to determine the effect of

AEO2006

energy prices on the rebuttable-presumption payback period.

C. Life-Cycle Cost and Payback Period Analysis

In response to the requirements of section 325(o)(2)(B)(i) of the Act, the Department conducted an LCC and payback period analysis to evaluate the economic impacts of possible new furnace and boiler energy conservation standards on individual consumers. This section of this notice describes the

LCC and payback period analysis. The Department conducted the analysis using a spreadsheet model developed in Microsoft (MS) Excel for Windows 2000 or XP. (See TSD, Chapter 8.)

The LCC is the total consumer expense over the life of the furnace or boiler, including purchase and installation expense and operating costs (energy expenditures and maintenance costs). To compute LCCs, the Department discounted future operating costs to the time of purchase and summed them over the lifetime of the furnace or boiler. The payback period is the change in purchase expense due to an increased efficiency standard, divided by the change in annual operating cost that results from the standard. Otherwise stated, the payback period is the number of years it would take for the consumer to recover the increased costs of a higher-efficiency product through energy savings.

The Department measures the change in LCC and the change in payback period associated with a given efficiency level relative to a base case forecast of equipment efficiency. The base case forecast reflects the market in the absence of amended mandatory energy conservation standards. It depicts the current status of the market, including the existing demand for products that exceed the current energy conservation standards.

The Department calculated the LCC and payback periods for a nationally representative set of housing units. It selected the representative sample of households from EIA's Residential Energy Consumption Survey (RECS). Whereas the 2004 ANOPR used the 1997 RECS, the analysis for today's proposed rule used the 2001 survey (RECS 2001), which are the most recent data available. For each sampled household, DOE determined the energy consumption and energy price for either a furnace or a boiler. Thus, by using a representative sample of households, the analysis allowed for the capture of the wide variability in energy consumption and energy prices associated with furnace and boiler use. The Department determined the LCCs and payback periods for each sampled household using the furnace or boiler energy consumption and energy price unique to each household, as well as other input variables. As discussed below, DOE characterized the other input variables with probability distributions. The Department calculated the LCC associated with the baseline furnace or boiler in each household. To calculate the LCC savings and payback period associated with more-efficient equipment (

i.e.,

equipment meeting higher efficiency standards), DOE substituted the baseline unit with a more efficient design.

Inputs for determining the total installed cost include equipment prices—which account for manufacturer costs, manufacturer markups, distributor and wholesaler markups, builder or contractor markups, and sales taxes—and installation costs. Inputs for determining operating expenses include annual household energy consumption, marginal natural gas and electricity prices, natural gas and electricity price projections, maintenance costs, equipment lifetime, discount rates, and the year standards take effect.

To account for uncertainty and variability in certain inputs, the Department created distributions of values with probabilities attached to each value. Of the listed installed cost inputs, DOE characterized the manufacturer, dealer, distributor, and builder markups, as well as the sales tax and installation price, with distributions. Of the operating cost inputs, it characterized the discount rate and the equipment lifetime with distributions. For each housing unit, DOE sampled and randomly selected the values of these inputs from the distributions, according to their probability. With regard to energy consumption and energy price, as noted earlier, DOE determined unique values for each sampled household. Although DOE did not characterize energy consumption and energy price with probability distributions, it captured the variability of these inputs by using a representative set of households in the LCC and payback period analysis. The LCC and Payback Period Model uses a Monte Carlo simulation to incorporate uncertainty and variability into the analysis when combined with Crystal Ball (a commercially available software program). The Monte Carlo simulations sampled input values randomly from the probability distributions. The model calculated the LCC and payback period for each design option for 10,000 housing units per simulation run.

AGA commented that it appeared DOE was using Monte Carlo analysis for variables that are independent and for which DOE did not account for the correlation. (AGA, No. 54 at p. 3) For those variables that it characterized with probability distributions, DOE had no evidence to suggest that any of the variables—for example, discount rates and equipment lifetime—were correlated with each other. Thus, DOE assigned the discount rate associated with any given household based on its probability of occurrence, without consideration of the assumed lifetime for the furnace or boiler in that household. In the case of energy consumption and energy price, because DOE determined unique values for each sampled household rather than assigning them using probability distributions, it in effect correlated energy consumption and energy price for each household.

AGA also said that probability distributions for a number of variables used in the uncertainty analysis appear to be unjustified by data. (AGA, No. 54 at p. 2) In constructing probability distributions for the variables, the Department used the most recent data from multiple sources (See TSD, Chapters 7 and 8). The Department reviewed the data used to develop the probability distributions for all of the variables. The Department believes that the distributions are supported by the available data.

GAMA commented that the LCC analysis should include financing costs, since many consumers use some form of credit to purchase a furnace or boiler. (GAMA, Public Meeting Transcript, No. 59.8 at p. 153) The Department implicitly accounts for financing costs in its application of discount rates. As discussed in section IV.C.7, the discount rate for equipment purchased as part of a new home is based on mortgage rates, and the discount rate for replacement equipment considers interest rates for a number of loan and credit types. Using these rates, the discounted sum of annual payments on a loan or credit amount would be equal to the total installed cost if it were paid in full at the time of purchase. Therefore, the Department believes it is not necessary to separately account for financing costs.

Table IV.3 summarizes the approach and data DOE used to derive the inputs to the LCC and payback period calculations for the 2004 ANOPR, and the changes it made for today's proposed rule. Discussion of the inputs and the changes follows in the sections below.

Table IV.3.—Summary of Inputs and Key Assumptions Used in the LCC and Payback Period Analyses

Inputs

2004 ANOPR description

Changes for proposed rule

Affecting Installed Costs

Equipment Price

Derived by multiplying manufacturer cost by manufacturer, distributor, contractor, and builder markups and sales tax, as appropriate

No change.

Installation Cost

Used a distribution of weighted-average installation costs from the Installation Model. Weight-averaged installation configuration by frequency of occurrence in the field

No change.

Affecting Operating Costs

Maintenance Costs

Used GRI data for gas furnaces and boilers, water heater rulemaking survey results for oil-fired equipment, and data from the 1993 rulemaking for mobile home furnaces

Same sources, supplemented with new information that indicates higher maintenance frequency for modulating equipment, and identical maintenance costs for condensing and non-condensing equipment (See TSD, Chapter 5).

Annual Heating Load

Calculated heating and cooling loads using 1997 RECS data. Assumed the furnace input capacity versus airflow capacity based on the vintage of the equipment and characteristics of each house

Calculated heating loads using 2001 RECS data (cooling loads not considered). Incorporated adjustment to account for change in new home size and shell performance between 2001 and 2015 (See TSD, Chapter 7).

Annual Energy Use

Used 26 virtual models that captured the range of common furnace sizes. Energy calculations used annual heating load for each housing unit

Same method, using RECS 2001 data.

Energy Prices *

Calculated 1998 average and marginal energy prices for each sample house. Used

AEO2003

forecasts to estimate future average and marginal energy prices

Calculated 2001 average and marginal energy prices for each sample house. Used

AEO2005

forecasts to estimate future average and marginal energy prices.

Affecting Present Value of Annual Operating Cost Savings

Lifetime

Used 2001.58(9) Appliance Magazine survey results

Same, except for boilers, for which DOE developed new estimates based on a literature review (See TSD, Chapter 8).

Discount Rate

Applied data from 1998 Survey of Consumer Finances and other sources to estimate a discount rate for each house. (See ANOPR TSD, Chapter 8)

Same sources; used more recent data (See TSD, Chapter 8).

* The Department used the

AEO2006

forecasts to estimate future average and marginal energy prices for the energy price sensitivity analysis. Section IV.C.4. provides further explanation of the rationale and methodology for the energy price sensitivity analysis.

1. Equipment Prices

As described in section IV.B.1 above, the Department determined manufacturing costs reflecting different efficiency levels using a reverse-engineering cost analysis for one size of equipment representative of each product class. To derive the manufacturing costs for other sizes of furnaces and boilers, DOE scaled the costs from the sizes used in the engineering analysis.

To develop a range of equipment sizes for non-weatherized gas furnaces that represent the majority of combinations of input capacity and nominal maximum airflow, the Department developed generic models to represent 26 different combinations of those two variables. The Department derived the models from baseline models with the most commonly occurring input capacities and corresponding maximum nominal airflow rates. To develop the manufacturing cost for each model, DOE took the cost from the engineering analysis for a model with a typical capacity, scaled the cost for other input capacities, and adjusted costs for furnaces with different-size blowers.

For the analysis of weatherized gas furnaces, DOE used the same generic models as in the analysis of non-weatherized gas furnaces. For the analysis of mobile home furnaces, the Department used a subset of those models. For the analysis of oil-fired furnaces and gas- and oil-fired boilers, the Department used a number of different sizes derived from the distribution of models in the GAMA March 2005 directory. For all of these product classes, DOE scaled the cost for each input size from the cost identified for a typical model for the specific product class in the engineering analysis.

The Department applied markups to the manufacturer cost of each virtual model to arrive at the equipment price paid by the purchaser. It determined markups on each stage of the distribution chain from the manufacturer to the consumer. (See TSD, Chapter 5.) In addition to estimating average markups, the Department characterized the markups with probability distributions through a statistical analysis of U.S. Census data. The markups assigned to units in the new construction subsample include a builder markup. The markups assigned to units in the replacement equipment subsample include sales taxes. The Department determined that the markup

for wholesalers and contractors on incremental costs for higher efficiency equipment is lower than the markup on the cost of a baseline model. Thus, for calculating the equipment cost of baseline equipment, the Department used the distribution of baseline markups. For the incremental cost of equipment at efficiency levels above the baseline, the Department applied incremental markups.

2. Installation Costs

The LCC and payback period analysis drew on the engineering analysis for installation costs at various efficiency levels. The Department assigned each household an installation cost from a distribution of weight-averaged values. For non-weatherized gas furnaces, oil-fired furnaces, and gas- and oil-fired boilers, DOE calculated the distribution using its Installation Model. For weatherized gas furnaces, DOE used calculations based on the RS Means approach to determine a mean value and assigned a triangular distribution of ±15-percent around the mean. For mobile home furnaces, it included the installation cost in the manufacturer markup.

3. Household Annual Energy Consumption

The Department calculated furnace fuel and electricity use by considering how furnaces operate in the sample housing units. (See TSD, Chapter 7.) While the AFUE measure does not consider electricity use, it is necessary to include it in the LCC analysis because both fuel and electricity consumption change with AFUE and these changes together determine the overall energy savings. The Department recognizes that the heat from a furnace blower contributes to heating the conditioned space. It included this effect in its LCC analysis to capture all operating expenses and completely evaluate the impact of new furnace standards on consumers.

The LCC and payback period analysis calculated furnace and boiler energy consumption under field conditions for a representative sample of housing units. These conditions included the climate conditions during the heating season and the size of the house, which influence the number of hours the equipment operates.

The calculation of furnace or boiler energy consumption required an estimate of the annual heating load for each housing unit (the amount of heat needed to keep it comfortable over an entire year). Determining the annual heating load for a housing unit required making assumptions about its size and construction, thermal efficiency, and geographical location. In the 2004 ANOPR analysis, DOE used data associated with the sample houses from the 1997 RECS. North Star Energy Group (NSEG) and Lennox commented that DOE's estimation of heating loads should account for improvement in thermal shells and changes in home size that are likely by the effective date of new standards. (NSEG, Public Meeting Transcript, No. 59.8 at p. 195; Lennox, Public Meeting Transcript, No. 59.8 at p. 166) In the analysis for today's proposed rule, the Department adjusted heating loads calculated for new construction housing units using data from

AEO2005

that projected changes in the thermal efficiency and the floor area of new houses. While thermal efficiency is projected to improve somewhat, the impact on heating load is roughly balanced by an expected increase in floor area. The Department applied these adjustment factors to the calculated heating loads for those RECS houses designated as representative of new houses.

Determination of the energy consumption of the equipment installed in each sampled housing unit also required estimating the input capacity and efficiency of the existing furnace. The Department then calculated how much energy furnaces with various improved designs would need to meet the heating load of the sampled housing unit.

The Department received several comments suggesting that it re-examine its 2004 ANOPR calculation of the energy consumption impacts of two-stage modulation. (GAMA, Public Meeting Transcript, No. 59.8 at p. 177; Individual, Public Meeting Transcript, No. 59.8 at p. 183; Lennox, Public Meeting Transcript, No. 59.8 at p. 152; York, No. 65 at p. 3; Carrier, No. 68 at p. 68; AGA, No. 78 at p. 4; and Alagasco, No. 82 at p. 2) For today's proposed rule, DOE took into account these comments and revised the energy consumption calculation. It used the 2004 public review draft of the proposed update of the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) SPC 103 test procedure, “Method of Testing for Annual Fuel Utilization Efficiency of Residential Central Furnaces and Boilers,” which accounts for the effects of two-stage modulation. The results now show that this design option does not provide efficiency benefits unless an electronically commutated blower motor is used.

ACEEE and ODOE commented that DOE's electricity consumption results in the 2004 ANOPR LCC analysis appear to be inconsistent with the data on average annual auxiliary electricity consumption (E

ae

) as reported in the GAMA directory of models. (ACEEE, No. 53 at p. 3; and ODOE, No. 61 at p. 4) For this proposed rule, DOE revised its approach for calculating electricity consumption for the LCC analysis. It based the revised calculations on data on the most current manufacturer product literature. (See TSD, Chapter 7) The resulting electricity consumption values are consistent with the data in the GAMA directory.

4. Energy Prices

The Department used average energy prices to calculate the energy costs of the base-case equipment and marginal energy prices for the cost of saved energy associated with higher-efficiency equipment. Marginal energy prices reflect a change in a consumer's bill associated with a change in energy consumed, and thus such prices capture the value of the increment of energy saved as a result of standards. Consumer gas bills typically have multiple rates—a base rate for the first block of gas used and different rates for further increments. Increased efficiency will impact the gas use at the rate applied to the last incremental consumption. For oil-fired furnaces and boilers, as well as gas furnaces using liquefied petroleum gas (LPG), the Department used average fuel prices for both base-case and higher-efficiency equipment, since consumers typically purchase fuel oil and LPG in bulk amounts, and the energy saved is based on the price paid for the bulk amount.

For each household sampled from the RECS database, DOE identified the average gas and electricity prices either from that household's data, if available, or from another household in the same Census division for which both prices were available. The Department estimated marginal energy prices from the RECS monthly billing data. The estimated marginal prices are very close to average prices. The Department invites comments on the methodology and data it used to determine marginal energy prices.

As in past rulemakings, the Department used price forecasts by the EIA to estimate the future trend in energy prices. It multiplied the average or marginal prices by the forecasted annual price changes in the Reference Case forecast in

AEO2005

.

EIA published its

Annual Energy Outlook

for 2006,

AEO2006

, after DOE had completed much of the analysis for this proposed rule. While the energy price forecast in

AEO2006

did not change substantially for electricity after

2015, the effective date of this rulemaking, the natural gas price forecasts were significantly different when compared to the energy price forecast in

AEO2005

. The natural gas price forecasts in the

AEO2005

are consistently lower by an average of $1.40 after 2015 than the natural gas price forecasts in the

AEO2006

. The oil price forecasts in the

AEO2005

are consistently lower by an average of $4.60 after 2015 than the oil price forecasts in the

AEO2006

by an average of $4.60 after 2015. On average, the

AEO2006

forecasts show approximately a 20-percent increase in energy prices over those in

AEO2005

. Since most of the energy used by furnaces is natural gas (and oil), this change could impact the analysis results. To account and assess the possible impact of these increases in projected energy prices, the Department conducted an energy price sensitivity analysis using the

AEO2006

scenario. The energy price sensitivity analysis uses recently published energy prices, housing starts, and site-to-source conversion factors based on the

AEO2006

. It examines the impact of these changes on the LCC and Payback Period, Consumer Subgroup, and National Impact analyses. The results of each analysis are shown in sections V.B.1.a., V.B.1.b., V.B.3.a., and V.B.3.b., respectively. For the

AEO2006

energy price sensitivity analysis, the Department determined that the consumers' purchasing decisions in the base case (

i.e.

, in the case where no change in standards is assumed to occur) would be similar to those as in the energy price trajectory using

AEO2005

. The Department welcomes comment on the determination of the forecast of the gas furnace shipments as a function of the energy prices. Furthermore, the Department intends to use the most recent energy price forecasts from the EIA in its revised analyses for the final rule.

5. Maintenance Costs

For the LCC analysis, DOE used the maintenance cost data derived in the engineering analysis. Based on a sensitivity analysis in a 1994 GRI report and on engineering judgment, the Department assumed a triangular distribution for maintenance costs to capture the variability of these costs among homes, with a minimum at 80 percent of the average cost and a maximum at 120 percent of the average cost. The Department is not aware of any recent data that provide a distribution of maintenance costs.

6. Equipment Lifetime

The Department defines the equipment lifetime as the age at which a furnace or boiler is retired from service. Because none of the available data on equipment lifetime show a clear relationship between efficiency and lifetime, DOE assumed that equipment lifetime is independent of efficiency. The Department used a triangular probability distribution from the range for each product class to assign a lifetime to individual furnaces and boilers in the sample housing units.

In the 2004 ANOPR, DOE used an average lifetime of 20 years for gas furnaces, 15 years for oil-fired furnaces and boilers, and 17 years for gas boilers. ACEEE commented that DOE's equipment lifetime estimates appeared to be somewhat short, and were a significant change from values used in the last DOE rulemaking on these products. ACEEE recommended that DOE look for field data on actual average equipment lifetime. (ACEEE, No. 84 at p. 11) The Department conducted a literature review to obtain estimates of boiler lifetime. Based on the information found, it increased the lifetimes used for gas- and oil-fired boilers to 25 years.

7. Discount Rates

The Department derived the discount rates for the LCC analysis from estimates of the finance cost to purchase a furnace or boiler. New-housing equipment is purchased as part of the home, which is almost always financed with a mortgage loan. Therefore, the Department estimated discount rates for new-housing equipment using the effective mortgage rate for home buyers, not simply the nominal rate. For the consumer life-cycle-cost calculation, the effective rate corresponds to the interest rate after deduction of mortgage interest for income tax purposes. Such adjustment is not appropriate for the NPV calculations. As described in section IV.D.7., for the NPV calculations the Department used discount rates of both seven percent and three percent, in accordance with the Office of Management and Budget (OMB)'s guidelines contained in

Circular A-4, Regulatory Analysis,

September 17, 2003. (OMB Circular A-4, § E (September 17, 2003)).

Households use a variety of methods, the prevalence of which may change over time, to finance a replacement furnace or boiler. The shares of different financing vehicles in total replacement equipment purchases are unknown, so the Department identified all possible customary sources of acquiring funds for purchase of replacement furnaces, including household assets that might be sold to raise funds. The Department then estimated the shares of the various debt and equity classes in the average U.S. household equity and debt portfolios using data from the 1998 and 2001 Federal Reserve Board's

Survey of Consumer Finances

(SCF) (See TSD, Chapter 8.) The Department estimated a distribution of interest or return rates associated with each type of equity and debt from the SCF and other sources, and then developed a distribution of weighted-average finance costs for replacement equipment.

NRDC commented that DOE's approach for deriving discount rates in the 2004 ANOPR analysis had shortcomings that resulted in the use of rates that were too high. (NRDC, No. 63 at p. 12) The Department acknowledges there are diverse views on selecting discount rates for household purchase of appliances, but the approach DOE used for furnaces and boilers is consistent with the method it used for its rulemaking for residential air-conditioning equipment. For this notice, DOE incorporated more recent data on consumer finances, mortgage rates, other debt interest rates, and rates of return on equity classes. The resulting discount rates are lower than those used in the 2004 ANOPR analysis for new-home furnace and boiler purchases (See TSD, Chapter 8.)

GAMA commented that using a different discount rate for each household is questionable. (GAMA, No. 67 at p. 7) The Department disagrees. Since the finance cost for purchasing a furnace or boiler varies among households depending on their financial situation, the Department found that using different discount rates was appropriate.

8. Effective Date of the New Standards

Generally all covered products to which a new or amended energy conservation standard applies must comply with the standard if they are manufactured or imported on or after a specified date. (42 U.S.C. 6291(10), 6295 (b)-(k)) Section 325(f)(3)(B) of EPCA directs that DOE is to publish a final rule for furnaces and boilers by January 1, 1994, and that any amendment shall apply to products manufactured on or after January 1, 2002. The Department has applied this eight-year implementation period to determine the effective date of any standard prescribed by this rulemaking. Since DOE expects to issue a final rule in 2007, the effective date for this rulemaking will be 8 years from the date of publication of the final rule, that is, in 2015. Thus, the

Department calculated the LCC and payback period for all consumers as if each one purchased a new residential furnace or boiler in 2015.

9. Inputs to Payback Period Analysis

The payback period is the length of time it takes the consumer to recover the higher installed cost of more-energy-efficient equipment through lower operating costs. Numerically, the payback period is the ratio of the increase in total installed cost (including the purchase price and installation cost) to the decrease in operating expenses (including maintenance). Thus, similar to the LCC, the payback period is based on the total installed cost and the operating expenses. However, unlike for the LCC, DOE considers only the first year's operating expenses in the calculation of the payback period. Because DOE considers only the first year's operating expenses, the payback period does not take into account changes in operating expense over time or the time value of money; that is, electricity price trends and discount rates are not required inputs. Energy expenses are the primary component of operating expenditures. The Department determines the energy-expense savings for the payback period as the first year's energy savings multiplied by the energy prices for the year in which a new standard is expected to take effect, in this case the year 2015.

The energy consumption DOE used to calculate the payback period for the LCC analysis reflects current field conditions for a representative sample of housing units. This approach to determining energy consumption and savings is in contrast to the rebuttable-payback-period calculations in the engineering analysis, which use the DOE test procedure's method for calculating annual energy consumption. The change in the annual energy consumption (otherwise called the energy savings) between the base-case furnace or boiler and a more efficient unit, as calculated in the LCC analysis, is smaller than the change in the energy consumption calculated from the DOE test procedure. Because smaller energy savings result in smaller decreases in operating expenses, the payback periods calculated for the LCC analysis are longer than the rebuttable-payback periods.

10. Base-Case Equipment

The base-case forecasts equipment that consumers are expected to purchase in the absence of new standards. In the 2004 ANOPR analysis, DOE developed the base-case forecast for each product class using the available data on shipments of furnaces and boilers by efficiency levels. For non-weatherized gas furnaces, the Department forecasted the base-case share of condensing furnaces based on the average growth rate for the period 1991-2000. The projected condensing furnace market share increased from 24 percent in the late 1990s to 27 percent in 2015. The Gas Technology Institute (GTI), ACEEE, NSEG, AGA, GAMA, York, and Lennox commented that DOE should account for recent market trends that are leading to greater sales of condensing gas furnaces. (GTI, No. 74 at p. 2; ACEEE, No. 84 at p. 13; NSEG, Public Meeting Transcript, No. 59.8 at p. 23; AGA, No. 59.8 at p. 42; GAMA, Public Meeting Transcript, No. 59.8 at p. 158; York, No. 65 at p. 2; and Lennox, 79 at p. 3) The Department agrees that use of the most recent data is important. In its analysis for this notice, the Department revised its assignment of gas furnaces to sampled housing units in the base case to reflect the recent trend toward a higher market share for condensing furnaces, as shown in shipments data through 2003 provided by GAMA. There is a strong correlation between condensing furnace market share and the natural gas price for the 1990-2003 period. The Department based the projected market share of condensing furnaces in 2015 on an evaluation of this correlation, projected natural gas prices from

AEO2005,

and market factors that could sustain the condensing furnace market share even with a lower gas price. The projected condensing furnace market share for 2015 is 35 percent. Therefore, for the LCC analysis base case, the Department assigned condensing furnaces to 35 percent of the sampled housing units with non-weatherized gas furnaces.

13

13

The Department assumed the same disbursement of condensing furnaces, 35 percent, within the sampled housing units for non-weatherized gas furnaces in the energy price sensitivity analysis, which it based on

AEO2006.

GAMA commented that the 2004 ANOPR analysis does not draw a correlation between an individual household's characteristics and the furnace it would have bought under the base case. (GAMA, Public Meeting Transcript, No. 59.8 at p. 158) The Department's analysis does correlate the type of furnace assigned as base-case equipment with certain household characteristics. Specifically, in assigning condensing furnaces as base-case equipment, the Department used a ranking of the RECS sample housing units by heating degree days to assign condensing furnaces to households in colder climates.

For other product classes, the Department assigned base-case equipment to the sampled housing units from a distribution of AFUEs that is representative of current shipments for each product class. The assignment of equipment efficiency took climate into account.

D. National Impact Analysis—National Energy Savings and Net Present Value Analysis

1. Shipments, National Energy Savings, and Net Present Value

The Department calculated the NES and the NPV of total customer costs and savings expected to result from new standards at specific efficiency levels, defined as a difference between a base-case forecast (without new standards) and the standards case (with new standards). The NES refers to cumulative energy savings from 2015 through 2038. The Department calculated net monetary savings in each year relative to the base-case as the difference between total operating-cost savings and increases in total installed cost. Cumulative savings are the sum of the annual NPV over the specified time period. The Department accounted for operating-cost savings until all the equipment installed through 2038 is retired.

An important element in the estimate of the future impact of a standard is product shipments. The shipments portion of the NES Spreadsheet uses historical data as a basis for projecting furnace and boiler shipments. Furnace and boiler shipments comprise units used to replace retired units of the same type or of another fuel type, as well as units installed in new homes. (See TSD, Chapter 9.)

In the 2004 ANOPR analysis, the Department estimated retirements based solely on past shipments and the assumed equipment lifetimes. For gas furnaces (all three product classes together), the resulting total shipments in the 1993-2001 period were less than those reported by GAMA. (GAMA, No. 24) For today's proposed rule, the Department added two additional components of gas furnace shipments in this period, early retirement and fuel switching, which brought the shipments estimated by the model into closer agreement with the GAMA data. (GAMA, No. 94)

The first added component of gas furnace shipments is the early retirement of non-condensing furnaces and their replacement with more-efficient condensing furnaces. Evidence for this trend can be seen in the GAMA data, which show a large increase in

condensing furnace shipments in this period in response to rising natural gas prices. The second added component is conversion from non-central gas heating to central heating with a gas furnace. There is evidence for this conversion in the RECS data, which show a large increase between 1993 and 2001 in homes with central gas heating that were built before 1990, as well as in the trade literature. The shipments from these additional components are most likely to be non-weatherized gas furnaces, because they account for about 90 percent of all gas furnace shipments. The Department assumed that shipments from these additional components follow a normal distribution, rising gradually from 1993, reaching a maximum value, and then decreasing again. It assumed that shipments from these additional components gradually taper off due to a decline in the number of homes for which conversion from non-central gas heating or early retirement of non-condensing furnaces is possible or economically attractive. The Department corrected replacements in subsequent years to avoid double-counting due to furnaces being removed from the stock before the end of their lifetime. The Department also estimated the annual number of replacements based on past shipments, projected shipments to new housing construction over the next decade, and equipment retirement rates.

York stated that the 2004 ANOPR analysis neglected the market for replacement of furnaces in mobile homes. (York, No. 65 at p. 5) In the NES calculations for the proposed rule, the Department included estimated shipments for replacement of furnaces in mobile homes.

To estimate future conversions to natural gas, DOE used data from utility surveys conducted by the AGA that report the numbers of households that converted to natural gas space heating. ACC commented that DOE should consider expected relative prices of natural gas and electricity in estimating future conversions. (ACC, No. 62 at p. 3) The Department estimated the annual conversions to natural gas as a constant percentage of projected replacements using data from the 1985-1995 period. The trend in relative energy prices in this period is similar to the trend of projected energy prices.

EEI commented that DOE should address the impact of DOE's new energy conservation standard for heat pumps on heating system conversions after January 2006. (EEI, No. 69 at p. 2) The Department believes few existing houses with a heat pump that is due to be replaced would be likely to convert to a combination of a gas furnace and central air conditioner, even if the price of a new heat pump is several hundred dollars more after the new central air conditioner/heat pump standard goes into effect. Houses with a heat pump typically lack venting systems, and/or access to a source of natural gas, which are necessary to convert to gas heating. Therefore, the Department did not include conversions from heat pumps to natural gas equipment in its analysis.

The Department also estimated the number of annual shipments of each product class going to new housing units as a function of the market share estimated for each product class. For non-weatherized and mobile home gas furnaces, the Department estimated market-shift effects from changes in relative fuel prices and from equipment price increases expected from higher efficiency standards. In forecasting gas furnace market shares, the Department assumed an impact of higher installed costs due to standards would be a decrease in market share held by gas furnaces in new construction, in favor of electric heating. The Department accounted for these market shift effects in the calculation of NES and NPV by considering the differential in energy consumption, utility bills and equipment cost between households with gas heating and those with electric heating. The Department based its estimates on the current market share of heat pumps and electric furnaces in households with electric space heating, as provided by RECS 2001. For non-weatherized gas furnaces, DOE assumed that heat pumps account for 54 percent of the additional electric heating equipment purchased due to market shift, and electric resistance furnaces account for 46 percent. It based these values on equipment shares in homes built in 1999-2003. For mobile home gas furnaces, the assumed shares of additional electric heating equipment purchased due to market shift are 41 percent for heat pumps and 59 percent for electric resistance furnaces. In determining market shift effects, the Department assumed the above shares of heat pumps and electric resistance furnaces remained constant over the analysis period. The Department invites comments on its assumption of constant heat pump and electric resistance furnace market shares in order to calculate the market shift effects on NES and NPV.

NPGA, Laclede, and NSEG recommended that DOE analyze the potential for a market shift from gas furnaces to electric heating equipment resulting from new gas furnace standards. (NPGA, No. 72 at p. 4; Laclede, No. 76 at p. 3; and NSEG, Public Meeting Transcript, No. 59.8 at p. 24) Similarly, EEI commented that DOE should consider how the increased energy-efficiency standards for heat pumps in 2006 will shift market shares in new construction from electric to gas space-heating systems. (EEI, No. 69 at p. 2) In the analysis for this notice, the Department used the same approach to evaluate market shifts as in the 2004 ANOPR analysis, but it used more recent data on heating equipment prices. (

See

TSD, Chapter 9.) The Department also included the impact of projected higher heat pump prices after 2006. (

See

TSD, Chapter 9.) Projected market share shifts are reflected in the MIA.

Southern and Carrier commented that standards for gas furnaces could induce switching to combination space- and water-heating appliances. (Southern, Public Meeting Transcript, No. 59.8 at p. 200; and Carrier, Public Meeting Transcript, No. 59.8 at p. 198) The Department believes that the historical market data necessary for estimating the potential for consumers to switch to combination space- and water-heating appliances do not exist. Therefore, DOE was not able to include this potential market effect in the shipments projection.

The Department estimated the future market shares of oil-fired furnaces and gas- and oil-fired boilers in total new housing completions based on their average shares in homes built in the 1999-2003 period. For new homes that use oil-fired equipment, gas is generally not available, so the Department considered the market shares to be independent of changes in equipment price due to the implementation of standards. Gas boilers in new homes are associated with specific types of heating systems, such as hydronic radiators or radiant floors, so substitution of alternative equipment is unlikely. Therefore, the Department assumed that the market share would not be affected by changes in equipment price due to standards.

Table IV.4 summarizes the approach and data DOE used to derive the inputs to the shipments analysis for today's proposed rule, and the changes made in the analysis for this proposed rule. (

See

TSD, Chapter 9.)

Table IV.4.—Approach and Data Used To Derive the Inputs to the Shipments Analysis

Input

2004 ANOPR description

Changes for proposed rule

Shipments*

Calculated total shipments for replacements based on past shipments and retirement function, and for new homes based on projection of new housing from

AEO2003.

The projected market shares in new homes were a function of relative heating equipment prices. Based conversions-upon-replacement on historic survey data

Same approach as ANOPR, with updated shipments data from GAMA. Included shipments for mobile home furnace replacement. Projection of new housing updated to

AEO2005.

Market share projection used re-estimated parameters. Model used two additional shipment categories to calibrate with GAMA data.

Replacements in kind

Replacement of worn-out heating equipment with unit of same equipment type (i.e., furnace versus boiler) and same fuel (natural gas or oil). Applies a replacement probability distribution based on equipment lifetime

No change.

Conversions

Replacement of worn-out heating equipment with equipment utilizing a different fuel. Based on utility surveys conducted by AGA that report the numbers of households that converted from oil or electricity to natural gas space heating. Source: AGA House Heating Survey 1985-1995

No change.

Installations in new housing

Installation of heating equipment into new single-family, multi-family or mobile homes according to construction rates and equipment type market shares. Used housing completions according to DOE forecast and modeled market shares according to energy and equipment price trends

No change.

Gas furnace early replacement

Not applied

Early replacement of non-condensing furnaces with more efficient condensing furnaces. Model calibrated to GAMA data, which show a large increase in condensing furnace shipments in response to rising natural gas prices.

Conversion from non-central gas heating to central heating with a gas furnace

Not applied

Conversion from non-central gas heating to central heating with a gas furnace. Model used RECS data, which show a large increase between 1993 and 2001 in homes with central gas heating that were built before 1990.

*For the energy price sensitivity analysis, the Department based its new housing projections on forecasts from the

AEO2006.

Section V.B.3.a presents the results of the energy price sensitivity analysis.

To make the analysis more accessible and transparent to stakeholders, the Department used an MS Excel spreadsheet model to calculate the NES and NPV. MS Excel is the most widely used spreadsheet calculation tool in the U.S. and there is general familiarity with its basic features. Thus, the Department's use of MS Excel for the spreadsheet models provides stakeholders access to the models within a familiar context. In addition, the TSD and other documentation that DOE provides during the rulemaking explain the models and how to use them, and stakeholders can review DOE's analyses by changing various input quantities within the spreadsheet. Unlike the LCC analysis, the NES Spreadsheet does not use distributions for inputs. The Department examined the sensitivity of monetary savings by applying different scenarios of energy prices and societal discount rates. (See TSD, Chapter 10.)

In addition to analyzing national impacts, the Department analyzed the NES and NPV for the

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