Energy Conservation Program for Consumer Products: Energy Conservation Standards for Central Air Conditioners and Heat Pumps
Federal RegisterNov 24, 1999
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SUMMARY: The Department of Energy publishes this Supplemental Advance
Notice of Proposed Rulemaking (ANOPR) to consider amending the energy
conservation standards for central air conditioners and heat pumps.
The purpose of this Supplemental ANOPR is to provide interested
persons with an opportunity to comment on:
First, the product classes that the Department is planning to
analyze;
Second, the analytical framework, models (e.g., the Government
Regulatory Impact Model (GRIM)), and tools (e.g., a Monte Carlo
sampling methodology, and life-cycle cost (LCC) and national energy
savings (NES) spreadsheets) that the Department has been using in
performing analyses of the impacts of energy conservation standards;
Third, the results of preliminary analyses for the engineering,
LCC, payback and NES contained in the Preliminary Technical Support
Document (TSD): Energy Efficiency Standards for Consumer Products:
Central Air Conditioners and Heat Pumps and summarized in this
Supplemental ANOPR; and
Fourth, the candidate energy conservation standard levels that the
Department has developed from these analyses.
DATES: Written comments must be received by February 7, 2000. The
Department requests 10 copies of the written comments and, if possible,
a computer disk. The Office of Building Research and Standards is
currently using WordPerfect 8.
A public hearing will be held on December 9, 1999, from 9 am-5 pm.
See Section IV of the Supplementary Information for further details.
ADDRESSES: Written comments should be submitted to: U.S. Department of
Energy, Attn: Brenda Edwards-Jones, Office of Energy Efficiency and
Renewable Energy, ``Energy Efficiency Standards for Consumer
Products,'' (Docket No. EE-RM-94-403), EE-431, Forrestal Building, 1000
Independence Avenue, SW, Room 1J-018, Washington, DC 20585, (202) 586-
2945.
The public hearing will be held at the U.S. Department of Energy,
Forrestal Building, 1000 Independence Avenue SW, Room 1E-245,
Washington, DC 20585.
Copies of the Preliminary TSD: Energy Efficiency Standards for
Consumer Products: Central Air Conditioners and Heat Pumps may also be
obtained from: U.S. Department of Energy, Office of Building Research
and Standards, 1000 Independence Avenue, SW, Rm 1J-018, Washington,
D.C. 20585-0121, (202) 586-9127. The Preliminary TSD will also be
available through DOE's web site. The Preliminary TSD provides the
technical details of the analysis that was conducted in support of the
Supplemental ANOPR being issued today.
Public Information: The public may visit the Freedom of Information
Reading Room, located at the US Department of Energy, Forrestal
Building, 1000 Independence Avenue, SW, Room 1E-190, Washington, DC
20585 between the hours of 9 am and 4 pm, Monday through Friday,
(except Federal holidays). Call (202) 586-3142 for information.
For more information concerning public participation in this
rulemaking proceeding, see section IV, ``Public Comment Procedures,''
of this document.
FOR FURTHER INFORMATION CONTACT: Dr. Michael E. McCabe, U.S. Department
of Energy, Office of Energy Efficiency and Renewable Energy, Forrestal
Building, Mail Station EE-41, 1000 Independence Avenue, SW, Washington,
DC 20585-0121, (202) 586-0854, E-mail: Michael.E.McC[email protected].
Edward Levy, Esq., U.S. Department of Energy, Office of General
Counsel, Forrestal Building, Mail Station GC-72, 1000 Independence
Avenue, SW, Washington, DC 20585, (202) 586-9507, E-mail:
Edward.L[email protected].
SUPPLEMENTARY INFORMATION:
I. Introduction
A. Authority
B. Background
1. History
2. Process Improvement
3. Test Procedure
II. Central Air Conditioners and Heat Pumps Analyses
A. Preliminary Market and Technology Assessment
1. Market Assessment
a. General
b. Product Specific
2. Technology Assessment
a. General
b. Product Specific
3. Preliminary Baseline Shipments Forecast
a. General
b. Product Specific
B. Screening Analysis
1. Product Classes
a. General
b. Product Specific
2. Baseline Equipment
a. General
b. Product Specific
3. Technology Screening
a. General
b. Product Specific
C. Engineering Analysis
1. Energy Savings Potential and Production Costs
a. General
b. Product Specific
i. Efficiency-Level Approach
ii. Reverse Engineering Approach
iii. Design Option Approach
iv. Outside Regulatory Changes Affecting the Engineering
Analysis
2. Manufacturing Costs
a. General
b. Product Specific
i. Characterizing Uncertainty
ii. Variability in Costs Among Manufacturers
iii. Proprietary Design
D. Life-Cycle Cost (LCC) and Payback Analysis
1. LCC Spreadsheet Model
a. General
b. Product Specific
i. LCC Analysis
ii. Equipment Prices
iii. Payback Analysis (Distribution of Paybacks)
iv. Rebuttable Payback
2. Preliminary Results
a. General
b. Product Specific
E. Preliminary National Impact Analyses
1. National Energy Savings (NES) Spreadsheet Model
a. General
b. Product Specific
i. Inputs to NES Analysis
ii. Shipments Model
iii. National Net Present Value
2. Preliminary Results
a. General
b. Product Specific
3. Indirect Employment Impacts
a. General
b. Product Specific
F. Consumer Analyses
1. Consumer Sub-group Analysis
a. General
b. Product Specific
2. Consumer Participation
a. General
b. Product Specific
G. Manufacturer Impact Analysis
1. Industry Characterization (Phase 1)
a. General
b. Product Specific
2. Industry Cash Flow (Phase 2)
a. General
b. Product Specific
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3. Manufacturer Sub-Group Analysis (Phase 3)
a. General
b. Product Specific
4. Interview Process
a. General
b. Product Specific
H. Competitive Impact Assessment
a. General
b. Product Specific
I. Utility Analysis
1. Proposed Methodology
a. General
b. Product Specific
J. Environmental Analysis
1. Proposed Methodology
a. General
b. Product Specific
K. Regulatory Impact Analysis
III. Proposed Standards Scenarios
IV. Public Comment Procedures
A. Participation in Rulemaking
B. Written Comment Procedures
C. Issues for Public Comment
V. Review Under Executive Order 12866 and other provisions
I. Introduction
A. Authority
Part B of Title III of the Energy Policy and Conservation Act, Pub.
L. 94-163, as amended by the National Energy Conservation Policy Act,
Pub. L. Law 95-619, the National Appliance Energy Conservation Act of
1987, Pub. L. 100-12, the National Appliance Energy Conservation
Amendments of 1988, Pub. L. 100-357, and the Energy Policy Act of 1992,
Pub. L. 102-486, (EPCA or the Act), created the Energy Conservation
Program for Various Consumer Products other than Automobiles. 42 U.S.C.
6291-6309.
The National Appliance Energy Conservation Act of 1987 amended EPCA
to impose performance standards for central air conditioners and heat
pumps as part of the energy conservation program for consumer products.
EPCA, section 325(d), 42 U.S.C. 6295 (d). EPCA also requires the
Department to publish final rules thereafter, to determine if these
standards should be amended.
Before the Department determines whether to adopt a proposed energy
conservation standard it must first solicit comments on the proposed
standard. EPCA, section 325 (p), 42 U.S.C. 6295 (p). Any new or amended
standard must be designed so as to achieve the maximum improvement in
energy efficiency that is technologically feasible and economically
justified. EPCA, section 325(o)(2)(A), 42 U.S.C. 6295 (o)(2)(A). To
determine whether economic justification exists the Department must
review comments on the proposal and determine that the benefits of the
proposed standard exceed its burdens based to the greatest extent
practicable, weighing the following seven factors:
(1) The economic impact of the standard on the manufacturers and on
the consumers of the products subject to such standard;
(2) The savings in operating costs throughout the estimated average
life of the covered product in the type (or class) compared to any
increase in the price, initial charges, or maintenance expenses for the
covered products that are likely to result directly from the imposition
of the standard;
(3) The total projected amount of energy savings likely to result
directly from the imposition of the standard;
(4) Any lessening of the utility or the performance of the covered
products likely to result from the imposition of the standard;
(5) The impact of any lessening of competition, as determined in
writing by the Attorney General, that is likely to result from the
imposition of the standard;
(6) The need for national energy conservation; and
(7) Other factors the Secretary considers relevant.
EPCA, Section 325(2)(B), 42 U.S.C. 6295(2)(B)
B. Background
1. History
The Energy Policy and Conservation Act, as amended (EPCA or Act),
requires the Department of Energy (DOE or Department) to consider
amending the energy conservation standards for certain major household
appliances. In 1992, the Department initiated engineering and LCC
studies for central air conditioners and heat pumps based on use of
computer simulation models. An ad hoc working group was formed to
advise the Department and to provide engineering and test data to use
with the computer models. The working group, which included
representatives from central air conditioner and heat pump
manufacturers, the Air Conditioning & Refrigeration Institute (ARI),
Lawrence Berkeley National Laboratory (LBNL), and Oak Ridge National
Laboratory (ORNL), also provided production cost data for establishing
the cost-effectiveness of the various design options selected for
study.
On September 8, 1993, the Department published an ANOPR (58 FR
47326 ) which discussed the number of product classes and design
options, the computer simulation models, and the methodologies which
the Department intended to use in its analysis of increased energy
efficiency standards for central air conditioners and heat pumps. After
the ANOPR was issued, the Department continued its analysis of LCCs,
payback periods, and preliminary NES which were shared with
representatives from the air-conditioning industry.
In 1995, the Department abandoned the approach of using computer
simulation models as a result of concerns expressed by the industry.
The concerns included: the cost/performance relations derived from the
computer simulations were not consistent with the experience of the
industry; the assumptions and procedures were flawed; and the industry
expressed doubts over the Department's experience with selection of
appropriate design options.
In October, 1995, a moratorium on proposing, issuing, or
prescribing energy conservation standards took effect pertaining to
standards for central air conditioners and heat pumps, and the dialogue
between the air-conditioning industry and the Department, on the
analysis performed, was suspended.
2. Process Improvement
During consideration of the fiscal year 1996 appropriations, there
was considerable debate about the efficacy of the standards program.
The Department of the Interior and Related Agencies Appropriations Act
for Fiscal Year 1996 included the aforementioned moratorium on
proposing or issuing energy conservation appliance standards for the
remainder of Fiscal Year 1996. See Pub. L. 104-134. Congress advised
DOE to correct the standards-setting process and to bring together
stakeholders (such as manufacturers and environmentalists) for
assistance. In September 1995, the Department announced a formal effort
to consider further improvements to the process used to develop
appliance efficiency standards, calling on manufacturers, energy
efficiency groups, trade association, state agencies, utilities and
other interested parties to provide input to guide the Department. On
July 15, 1996, the Department published a Final Rule: Procedures for
Consideration of New or Revised Energy Conservation Standards for
Consumer Products (hereinafter referred to as the Process Rule). 61 FR
36974.
The Process Rule outlines the procedural improvements identified by
the interested parties. The process improvement effort included a
review of the: (1) Economic models, such as the Manufacturer Analysis
Model and Residential Energy Model; (2) analytical tools, such as the
use of a Monte Carlo sampling methodology; and (3)
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prioritization of future rules. The Process Rule requires the
evaluation of uncertainty and variability by doing scenario or
probability analysis (as detailed in the Process Rule, 10 CFR part 430,
subpart C, appendix A sections 1(f), 4(d)(2), and 10(f)(1)). In
addition, an Advisory Committee on Appliance Energy Efficiency
Standards, consisting of a representative group of these interested
parties, was established to make recommendations to the Secretary
regarding the implementation of the Process Rule.
The Process Rule is applicable in this rulemaking to develop new
central air conditioner and heat pump standards. In this Supplemental
ANOPR, the Department is presenting the framework by which it will
develop the standards. The framework reflects improvements and steps
detailed in the Process Rule. The rulemaking process is dynamic. If
timely new data, models or tools that enhance the development of
standards become available, they will be incorporated into the
rulemaking. For example the Advisory Committee has made several
recommendations and the Department has developed new models which are
discussed in this Supplemental ANOPR.
The Department held a workshop on June 30, 1998 to discuss the
analytical framework that was being proposed for conducting the central
air conditioner and heat pump rulemaking. The analytical framework
presented at the workshop described the different analyses (e.g., the
LCC, payback and national impact analyses) to be conducted (See Table
1), the methods proposed for conducting them, and the relationship
among the various analyses.
Table 1.--Central Air Conditioner and Heat Pump Analyses Under Process Rule
----------------------------------------------------------------------------------------------------------------
ANOPR NOPR Final Rule
----------------------------------------------------------------------------------------------------------------
Screening Analysis................... Revised Pre-ANOPR Analyses Revise Analyses (LCC and National Impacts
(LCC and National Impacts Analyses).
Analyses).
Engineering Analysis................. Consumer Sub-group Analysis.
LCC Analysis......................... Industry Cash Flow Analysis
(GRIM).
Preliminary National Impacts Analysis Manufacturer Impact Analysis.
Utility Impact Analysis.
Environmental Analysis.
----------------------------------------------------------------------------------------------------------------
A number of concerns were raised at the framework workshop relating
to the application of the Process Rule to the central air conditioner
and heat pump rulemaking, with particular emphasis on (1) the
appropriate approaches for conducting the Engineering Analysis, (2) how
to validate manufacturer cost figures submitted by ARI, (3) methods for
developing consumer equipment price data, and (4) how non-regulatory
issues, e.g., the phase-out of hydro-fluoro-chloro-carbon (HCFC)
refrigerants might affect the effective date of any new standards.
In response to the concerns and comments of interested parties at
the Framework Workshop, the Department decided to perform the
Engineering Analysis based on the efficiency-level approach rather than
the design option approach, using cost data submitted by manufacturers
in aggregate via their trade association, ARI. The Department also
decided to utilize a reverse engineering approach as a ``stand alone''
analysis for developing manufacturer costs and validating the ARI-
provided manufacturer's cost data. Both approaches are discussed in
detail in the discussion of the Engineering Analysis (II C.).
As part of the information gathering and sharing process, the
Department and its contractors met several times with members of the
ARI Unitary Equipment Regulatory Committee, presenting the preliminary
manufacturer costs developed through the reverse engineering approach
and demonstrating the LCC spreadsheet model. During this time period,
ARI submitted relative production cost data for the four different
product classes of central air conditioners and heat pumps (split
system and single package for both air conditioners and heat pumps) for
3-ton capacity systems at various efficiency levels. Efficiency levels
are defined differently for air conditioners and for heat pumps. Air
conditioner efficiency is defined by the descriptor, Seasonal Energy
Efficiency Rating (SEER). Heat pump efficiency is defined by the
descriptor, Heating Season Performance Factor (HSPF) while operating
during the heating season and by SEER while operating during the
cooling season. The cooling season efficiencies provided by ARI ranged
from 11 to 14 SEER. The individual manufacturers provided their costs,
which were normalized to 10 SEER equipment costs, to ARI. ARI
aggregated the individual manufacturers' costs and provided the
Department with minimum, maximum and shipment-weighted mean values.
As will be discussed in the Engineering Analysis, the ARI-provided
and reverse engineering manufacturer costs overlap considerably,
especially at the lower efficiency levels in the split air conditioning
class and in the middle efficiency levels of the split heat pump class.
For the most part, the range between ARI's minimum and mean
manufacturer costs completely encompasses the reverse engineering
costs. This agreement is encouraging given the levels of uncertainty
and variability involved in estimating representative manufacturer
costs under different efficiency baselines across a diverse industry.
These areas of convergence provide an excellent indication of the most
likely costs of producing equipment utilizing today's technology under
new standard levels.
Although the two sets of manufacturer costs do overlap, they
disagree in some respects. In particular, there are significant
differences in the breadth of the manufacturer cost distributions at
each efficiency level. The Department assumes that vigorous competition
in the market for minimum-efficiency equipment will compel
manufacturers to meet new standards at similar incremental manufacturer
costs, and that the market cannot sustain as broad a range of costs as
ARI's results may imply. Furthermore, we cannot replicate ARI's maximum
manufacturer costs without altering our underlying assumptions beyond
what we currently consider justified.
The Department and ARI have worked diligently to identify possible
sources of those discrepancies. The Department sincerely appreciates
ARI's and its members' dedicated participation in the Engineering
Analysis. Their relative manufacturer costs provide a solid
[[Page 66309]]
foundation for further analysis, and their frequent review of and input
to our validation effort is a valuable addition to our understanding of
the production and design issues associated with meeting higher
standards. The Department will work with ARI to understand the
remaining differences between our two sets of manufacturer costs.
With regard to the LCC, payback, and preliminary national impact
analyses, three new spreadsheet tools were developed for this
rulemaking in an effort to meet the objectives of the Process Rule. The
first spreadsheet calculates LCC and payback. The second one calculates
impacts of standards at various levels on shipments. The third
calculates the NES and national net present values (NPV) at various
standard levels. These spreadsheets and the results of the preliminary
analysis were posted on the Department's web site on August 24, 1999.
The preliminary results posted on the web consisted of two sets of
data: one set based on the manufacturer costs submitted by ARI and the
other set based on manufacturer costs developed through reverse
engineering. The Department suggested that any errors in the web site
materials be immediately brought to our attention for correction, and
that any other comments be submitted during the 75 day period following
publication of this Supplemental ANOPR.
The Department has reviewed the recommendations made by the
Advisory Committee on Appliance Energy Efficiency Standards on April
21, 1998. (Advisory Committee, No. 96) These recommendations relate to
using the full range of consumer marginal energy rates (CMER) in the
LCC Analysis (replacing the use of national average energy prices),
defining a range of energy price futures for each fuel used in the
economic analyses and defining a range of primary energy conversion
factors and associated emission reductions, based on the generation
displaced by energy efficiency standards for each rulemaking. The
Department has incorporated the use of consumer marginal energy rates
and a range of future energy prices for the analysis that was conducted
for this Supplemental ANOPR. The Department plans to incorporate the
recommendations on energy conversion factors in future analyses for the
Notice of Proposed Rulemaking (NOPR).
Today's Supplemental ANOPR pertains to central air conditioners and
heat pumps and utilizes the framework described in Section II. Both
written and verbal comments from the June 30, 1998 Framework Workshop
are being addressed in this document. The commentor's name and
organization are shown in parentheses after each comment. Written
comments are further identified by a number assigned to each set of
written comments received during the commentary period. Verbal comments
are further identified by the page number in the workshop transcript.
Written comments and the Workshop transcript are viewable at the
Department's Freedom of Information Reading Room described previously.
3. Test Procedure
Section 7(b) of the Process Rule states that necessary
modifications to test procedures concerning efficiency standards will
be identified and proposed before issuance of an ANOPR. The residential
central air conditioner and heat pump test procedure is currently being
revised to improve its organization and ease of use, with a proposed
rule expected in November, 1999. This revision of the test procedure is
not expected to alter the measured efficiencies as determined under the
existing test procedure. Therefore, the revised test procedure would
not affect development of revised efficiency standards. For these
reasons, revisions to the test procedure are not a ``necessary
modification'' as that term is used in the Process Rule, but rather a
routine update, and hence need not be proposed before issuance of the
proposed rule for these standards.
II. Central Air Conditioner and Heat Pump Analyses
This section includes a general introduction to each analysis
section and provides a discussion of issues relevant to energy
conservation standards for central air conditioners and heat pumps.
The Department received a number of general comments from Energy
Market & Policy Analysis (EMPA) regarding the analysis conducted for
the rulemaking (EMPA, # 3). Some of these concern the rulemaking
procedure, while others refer to the analytic methods, and are as
follows: the methodology for evaluating standards is extremely complex
and increasingly unrealistic; approaches, models, assumptions, data,
and data sources need to be more detailed and should to be put out for
public comment before issuance of the ANOPR; and inadequate
consideration is given to the impact of standards on ``real consumers''
as EMPA believes that groups on the DOE Advisory Committee do not
represent and protect the interests of ``real consumers.''
The Department appreciates the concerns expressed previously. The
methods and approaches used for the analyses conducted for this
Supplemental ANOPR are well described and have been released on the
Department's web site prior to the issuance of this notice. Any
questions or comments as to how to clarify the methodologies used in
this rulemaking are always welcome and appreciated.
A. Preliminary Market and Technology Assessment
The preliminary market and technology assessment characterizes the
relevant product markets and existing technology options including
prototype designs.
1. Market Assessment
a. General
When initiating a standards rulemaking, the Department develops
information on the present and past industry structure and market
characteristics of the product(s) concerned. This activity consists of
both quantitative and qualitative efforts to assess the industry and
products based on publicly available information. Issues to be
addressed include: (1) Manufacturer market share and characteristics;
(2) trends in the number of firms; (3) the financial situation of
manufacturers; (4) existing non-regulatory efficiency improvement
initiatives; and (5) trends in product characteristics and retail
markets. The information collected serves as resource material to be
used throughout the rulemaking. For instance, historical product
shipments and prices are used to help predict future prices and
shipments. Market structure data are particularly useful in conducting
the competitive impacts analysis.
b. Product Specific
The Department reviewed existing literature and interviewed
manufacturers to get an overall picture of the residential central air-
conditioning market in the United States. Industry publications and
trade journals, government agencies, and trade organizations provided
the bulk of the information, including: (1) Manufacturer market share;
(2) shipments by capacity and efficiency level; (3) price distribution;
(4) market saturation; and (5) distribution trends. The information
described is discussed in the sections where it is used in the
analysis.
Edison Electric Institute (EEI) commented that contractors should
be interviewed when market assessments are being developed (EEI, # 2)
while the
[[Page 66310]]
Oregon Office of Energy (OOE) requested the Department to gather
information on trends in product characteristics and non-regulatory
efficiency improvement initiatives, and to interview manufacturers of
components (compressors, motor/fan assemblies, heat exchangers) on
initiatives to improve system efficiency. (OOE, # 7) The Department
relied predominantly upon literature searches and input from equipment
manufacturers while developing its market assessment, but also
interviewed national contracting organizations, independent contractors
and component suppliers. Of course, this market assessment is
preliminary, and any additional comments will be taken into
consideration when the assessment is revised.
2. Technology Assessment
a. General
Information relating to existing and past technology options and
prototype designs are typically used as inputs to determine what
technologies manufacturers utilize to attain higher energy efficiency
levels. In consultation with interested parties, the Department
develops a list of technologies that can and should be considered.
Initially, the technologies encompass all those considered to be
technologically feasible and serve to establish the maximum
technologically feasible design.
b. Product Specific
The Department based its list of technically feasible design
options on design options included in a previous ANOPR (58 FR 47326,
September 8, 1993). The Department then updated the list through
consultation with manufacturers of components and systems, trade
publications, and technical papers. Since many options for improving
product efficiency are available in existing equipment, product
literature and direct examination provided additional information.
Further descriptions of the most current technologies are provided in
the engineering section of the Preliminary TSD.
OOE asserted that all appropriate component and system technologies
must be considered in the technology assessment, and that it should
include microchannel heat exchangers and electrohydrodynamic
enhancement technologies (OOE, # 7). Additional technologies were
considered as set forth in the Technology Screening Analysis (section
II.B.3) including such emerging technologies as microchannel heat
exchangers, modulating compressors, and advanced variable speed motors
and controls. Electrohydrodynamic enhancement technologies were not
considered as they have yet to be publicly demonstrated in prototypical
central air conditioner and heat pump designs.
3. Preliminary Baseline Shipments Forecast
a. General
The Department develops a preliminary baseline forecast of product
shipments that assumes no new standards. This is an initial step in an
iterative process. Subsequently, a more comprehensive baseline
shipments forecast is prepared using a shipments model, superceding the
preliminary forecast.
The baseline shipments forecast is used as an input to the National
Benefits Analysis. To perform the National Benefits Analysis, a
forecast of shipment-weighted product efficiencies is prepared to the
year 2030. To assess the average impact on the affected consumer, a
forecast of product shipments by efficiency level was prepared for the
year a new standard would come into effect.
b. Product Specific
The Department prepared a baseline shipments forecast for central
air conditioners and heat pumps. Data on historical product shipments
guided preparation of the preliminary baseline shipments forecast.
The Oregon Office of Energy (OOE) pointed out that non-regulatory
energy efficiency programs are on the wane, and that if these programs
are to be considered in shipment forecasting, it must be quantifiably
demonstrated how they will transform the market (OOE, #7). Information
from parties involved in market-based initiatives for increasing the
sales of high-efficiency models was reviewed, but provided no
quantifiable measure of how these programs impact product efficiencies
on a national basis. However, because the baseline forecast assumes an
efficiency distribution of 10.7 SEER, based on current sales, the
impact of market-based initiatives is implicit in the baseline
forecast.
OOE also noted that since central air conditioning is not an
essential appliance for most areas of the country, central air
conditioning purchase price elasticities will likely be different than
those used for forecasting shipments in other product rulemakings (OOE,
#7). Since the shipments model used in this rulemaking was prepared
specifically for central air conditioners and heat pumps, the
Department believes this concern is addressed. The shipments model is
further described in the Preliminary National Impacts Analysis
discussion in section E.1.b.ii.
B. Screening Analysis
The Screening Analysis reviews various technologies with regard to
whether they: (a) Are technologically feasible; (b) are impracticable
to manufacture, install and service; (c) have an adverse impact on
product utility or product availability; and (d) have adverse impacts
on health and safety. The subsequent Engineering Analysis does not
consider or incorporate technologies that do not pass these tests,
regardless of whether the Engineering Analysis takes a Design Option
approach or an Efficiency-level approach. Technologies that pass the
Screening Analysis tests may be considered further to determine their
potential cost and efficiency impacts. The Screening Analysis also
identifies possible product classes and baseline equipment to serve as
a basis for further analysis.
1. Product Classes
a. General
Product types are divided into classes using the following
criteria: (a) The type of energy used; (b) capacity; and (c)
performance-related features that affect consumer utility or
efficiency. Different energy efficiency standards are applied to
different product classes. In general, classes are defined using
information obtained in discussions with appliance manufacturers, trade
associations, and other interested parties.
b. Product Specific
As prescribed by the National Appliance Energy Conservation Act
(NAECA), central air conditioners and heat pumps are each categorized
into split and single package systems, giving four product classes. The
analysis performed to date includes only products in these four product
classes at a nominal 3 ton capacity. However, there may be
justification for establishing additional classes including product
types such as:
Through-the-wall condensing units,
Ductless split systems,
High-velocity space-conditioning systems, and
Vertical packaged, wall mounted.
The Department is also considering establishing new classes defined
by the cooling or heating capacity of the equipment.
OOE felt that the addition of more classes may be reasonable. For
example, mini-splits and combined space/water
[[Page 66311]]
heating systems might be considered as separate classes based on their
characteristics and configuration constraints (OOE, #7).
EEI commented that the product classes be expanded to include gas-
fired air-conditioning equipment. Gas-fired equipment would then not be
included as a design option, but as an additional product class for
which baseline models must be developed. (EEI, # 2) Although the
Department appreciates EEI's comments, the NAECA definition of central
air conditioners subsumes only certain types of electric driven
systems. This rulemaking addresses only products covered by that
definition, and thus, no consideration will be given here to developing
standards for fuel driven technologies.
With regard to the additional product classes listed in this
section, the Department is seeking input on whether they need to be
established.
2. Baseline Equipment
a. General
The Department defines baseline equipment for each product class as
the starting point for analyzing energy efficiency improvements.
Baseline equipment are models with the minimum allowable energy
efficiency specified by the NAECA. Such baseline equipment are
typically ``low-end'' units that contain no premium features, e.g.,
noise reduction or appearance features.
b. Product Specific
Efficiency is the most important statistic required to establish
the baseline model. Current minimum efficiency standards for split and
single package system central air conditioners and central air
conditioning heat pumps are 10.0 and 9.7 SEER, respectively. The
current minima for the heating performance of split and single package
central air conditioning heat pump systems are 6.8 and 6.6 HSPF,
respectively. The Department used the split system minimum efficiency
standards as the baseline efficiency for each of the above classes. If
additional classes are created, the Department will apply the
appropriate existing standard as the baseline efficiency for that
class.
OOE agreed with the Department's intent to use the efficiency of
products that just meet the current minimum NAECA requirements as the
baseline efficiency. (OOE, #7)
3. Technology Screening
a. General
An initial list of efficiency enhancement options is developed from
the technologies identified in the technology assessment. Then the
Department, in consultation with interested parties, reviews the list
to determine if they are practicable to manufacture, install and
service, would adversely affect product utility or product
availability, or would have adverse impacts on health and safety.
Efficiency enhancement options not eliminated in the screening process
are considered further in the Engineering Analysis.
b. Product Specific
Compiling a list of efficiency enhancement options provided an
understanding of the technologies available to manufacturers to improve
equipment efficiency. This understanding also helped the Department
estimate maximum technologically feasible efficiency levels. For split
air conditioners, the Department believes, based on a preliminary
analysis, that 20 SEER is the highest efficiency level attainable by
2006 on a commercially practicable basis using design and technology
options that pass the screening criteria. These include the following:
enhanced and oversized heat transfer surfaces; variable or multispeed
or variable capacity compressors; high efficiency compressors;
electrically-commutated, variable-speed fan or blower motors, and
thermostatic or electronic expansion valves. We assumed that the
efficiency of compressors, motors, and heat transfer surfaces would
improve slightly prior to the effective date of any new rule. The 20
SEER level does not depend on any emerging technologies, because the
Department believes that, although those technologies could reduce the
cost of the equipment in the SEER 13 to SEER 17 range compared to
established technologies, the emerging technologies will not advance
the maximum attainable efficiency level.
The analysis of manufacturing costs and prices was based only on
technologies and designs available in mass produced products as of
1998. The Department considered the potential cost impact of emerging
technologies in a separate analysis described in the Preliminary TSD.
The emerging technologies that pass the screening criteria include:
Microchannel heat exchangers
Advanced compressors
Variable speed motor controls
The American Council for an Energy Efficient Economy (ACEEE), OOE,
Modine Manufacturing (Modine), and York International (York) all
provided comments pertaining to emerging technologies. Both ACEEE and
OOE suggested that all advanced or emerging technologies be considered
(ACEEE, #5; Steve Nadel, ACEEE, Transcript, pp 80-81; OOE, #7) . ACEEE
identified improved compressors and microchannel heat exchangers. ACEEE
also stated that emerging technologies could be analyzed in the context
of a reverse engineering analysis. Modine stated that PF (microchannel)
heat exchangers are a viable technology for improving equipment
efficiency, but their acceptance should be driven by market needs
rather than through a desire to push the technology into the market
(Modine, #1). Bristol Compressors (Bristol) is now bringing to market
the Twin-Single (TS) compressor, a reciprocating compressor that
reduces system capacity by de-activating one or more pistons under
part-load operating conditions. Bristol states that this technology can
increase central air conditioner and heat pump efficiency from either
10 to 12 SEER or from 12 to 14 SEER. With a variable-speed indoor
blower, the TS can increase system efficiency from 10 to 14 SEER (York,
#4).
In contrast, an industry representative contended that emerging
technologies would already be in the marketplace if they were feasible
and that, in the context of conducting an Engineering Analysis based on
the use of the efficiency-level approach, emerging technologies should
not be considered until they are shown to radically change the shape of
the industry cost curve. (Jim Crawford, The Trane Company (Trane),
Transcript, pp 81,87) ARI stated that in developing an aggregate
industry cost curve, emerging technologies may or may not be included
depending on whether manufacturers submitting data include them in
their cost estimates (Ted Leland, ARI, Transcript, pp 85).
The Department has performed a preliminary assessment of the
potential impact of these technologies on the manufacturing costs of
air-conditioning equipment and is seeking comment on the following:
Whether these emerging technologies do in fact pass the screening
criteria; the potential impact of these technologies on manufacturing
cost, operating cost, and price; whether additional emerging
technologies should be considered; and whether the maximum
technologically feasible level is commercially practical.
The Department notes that it is not considering fuel-driven
technologies, such as gas-fired engine driven heat pumps, absorption
heat pumps, and Stirling refrigeration cycles, as design options for
central air conditioners and heat pumps. NAECA defines a central air
conditioner and heat pump, in part,
[[Page 66312]]
as being ``powered by single phase electric current.'' This rulemaking
concerns only products that meet the NAECA definition. Thus, fuel-
driven technologies are precluded from consideration here.
C. Engineering Analysis
The purpose of the Engineering Analysis is to estimate the energy
savings potential from increased equipment efficiency levels and the
costs of achieving those levels, compared to the baseline equipment.
The increased efficiency levels are associated with increased
production costs. The efficiency/cost relations developed in the
Engineering Analysis are combined with end-user costs in the LCC
Analysis.
1. Energy Savings Potential and Production Costs
a. General
The Engineering Analysis estimates the energy savings potential of
the individual or combinations of design options not eliminated in the
previous Screening Analysis. The Department, in consultation with
stakeholders, uses the most appropriate means available to determine
energy consumption, including an overall system approach or engineering
modeling. Ranges and uncertainties in performance are established.
The Engineering Analysis involves adding individual or combinations
of design options to the baseline equipment. A cost-efficiency
relationship is developed to show the manufacturer cost of achieving
increased efficiency. The efficiency levels corresponding to various
design option combinations are determined from manufacturer data
submittals and from DOE engineering calculations.
EPCA requires that, any new or amended standard, ``shall be
designed to achieve the maximum improvement in energy efficiency that
the Secretary determines is technologically feasible and economically
justified.'' EPCA, section 325(l)(2)(A), 42 U.S.C. 6295(l)(2)(A). An
essential role of the Engineering Analysis consists of identifying the
maximum technologically feasible level. The maximum technologically
feasible level is one that can be reached by the addition of efficiency
improvements and/or design options, both commercially feasible or in
working prototypes, to the baseline equipment. The Department believes
that the design options must have been physically demonstrated in at
least a prototype form to be considered technologically feasible.
Three methodologies can be used to generate the manufacturing costs
needed for the Engineering Analysis. These methods include: (1) The
design-option approach, reporting the incremental costs of adding
specific design options to a baseline model; (2) the efficiency-level
approach, reporting relative costs of achieving energy efficiency
improvements; and/or (3) the reverse engineering or cost-assessment
approach which requires a ``bottoms-up'' manufacturing cost assessment
based on a detailed bill of materials for models that operate at
particular efficiency levels. The Department considers public comments
in determining the best approach for a rulemaking.
If the efficiency-level approach is used, the Department will
select appropriate efficiency levels for data collection on the basis
of: (1) Energy savings potential identified from engineering models;
(2) observation of existing products on the market; and/or (3)
information obtained for the technology assessment. Stakeholders will
be consulted on the efficiency-level selection.
The use of a design-option approach provides useful information
such as the identification of potential technological paths
manufacturers could use to achieve increased product energy efficiency.
It also allows the use of engineering models to simulate the energy
consumption of different design configurations under various user
profiles and applications. However, the Department recognizes that the
manufacturer cost information derived in the design-option approach
does not reflect the variability in design strategies and cost
structures that can exist among manufacturers. Therefore, the
Department may derive additional manufacturing cost estimates from
other approaches developed in consultation with interested parties.
The reverse engineering or cost-assessment approach can be used to
supplement the efficiency-level or design option approaches under
special circumstances when data is not publically available for
proprietary reasons, the product is a prototype and/or the data is not
provided by the manufacturers.
b. Product Specific
The Department, in consultation with stakeholders, has used both
overall efficiency level and reverse engineering approaches. The
efficiency-level analysis relies upon manufacturer cost submittals from
ARI while the reverse engineering analysis relies upon manufacturer
costs developed by Arthur D. Little, Inc. (ADL) for the Department. The
design options selected in the Screening Analysis helped to establish
potential efficiency improvements.
Manufacturing cost estimates under the efficiency-level approach
were submitted by individual manufacturers to ARI. For purposes of
ensuring manufacturer confidentiality, ARI submitted to the Department
minimum, maximum, and shipment-weighted averages of incremental
manufacturer cost increases associated with various efficiency levels.
In the case of the reverse engineering approach, ADL derived
manufacturing cost estimates from detailed incremental cost data
enabling them to establish costs for labor, purchased parts and
material, shipping/packaging, and investment. Both sets of manufacturer
costs were input into the Engineering Analysis and cost-efficiency
relationships were developed to show the manufacturing costs of
achieving various levels of increased efficiency.
As discussed earlier in the section on Process Improvement,
attempts were made to reconcile differences between the ARI and the
preliminary reverse engineering production cost data. Feedback from the
industry resulted in revising the reverse engineering production costs
of such components as outdoor cabinet (labor and materials), indoor
coil (materials) and refrigerant materials. Packaging and shipping
costs were also revised. The Department is continuing consultations
with manufacturer representatives regarding other industry suggested
issues, including manufacturing production volume, copper and aluminum
raw material costs, compressor costs, indoor and outdoor coil costs,
and freight costs. For more detail on how the ARI and the reverse
engineering costs were developed, and our revisions to the reverse
engineering costs, please refer to the Preliminary TSD. As noted
earlier, these revisions helped to reconcile some of the differences
between the ARI production costs and the reverse engineering production
costs, but remaining differences between the two sets of manufacturer
cost require further examination.
i. Efficiency-Level Approach
The efficiency-level approach establishes the relationship between
manufacturer cost and increased efficiency at predetermined efficiency
levels. It has the distinct advantage of being simple and straight
forward. Manufacturers typically provide incremental manufacturer cost
data for
[[Page 66313]]
incremental increases in efficiency. Cost-efficiency curves can be
easily constructed to clearly identify at what point manufacturers are
incurring significant costs to raise efficiency. Additionally, the
efficiency-level approach allows manufacturers the ability to supply
detailed cost data without revealing their unique design strategies for
achieving increased efficiency levels.
But the simplicity of the efficiency-level approach is also its
primary drawback. Namely, since technological details are not provided,
it is extremely difficult to verify whether the costs provided for each
specific efficiency level are truly representative of the costs for
that level. In addition, prototypical designs become difficult to
evaluate and maximum technologically feasible designs are then
difficult to ascertain. As a result, some other type of analysis is
likely needed in order to verify the accuracy of the costs supplied
through the efficiency-level approach.
In reply to the Department's request to stakeholders at the 1998
Framework Workshop regarding the most appropriate approach which should
be pursued for the Engineering Analysis, some industry members stated
their support for the efficiency-level approach (Ted Leland, ARI; David
Lewis, Lennox International Inc (Lennox), Transcript, pp 55-56, 61,
76). More specifically, these industry members stated their intention
to provide costs under the efficiency-level approach as one cost-
efficiency curve that would represent an aggregate of the entire
industry, i.e., a smooth curve relating the relative manufacturer cost
increases associated with increased efficiency. Industry indicated that
the curve would represent the 90th percentile, i.e., the cost
efficiency level at which 90% of manufacturers would be able to produce
product.
ACEEE and the OOE stated they would be willing to accept the
efficiency-level approach only if certain conditions were met (ACEEE,
#5, OOE, #7; Steven Nadel, ACEEE, Transcript, pp 65-67; Charlie
Stephens, OOE, Transcript, pp 65-67). For example, in addition to
providing costs at the 90th percentile, costs at multiple percentiles
should be reported. Having the full distribution of costs allows for a
more meaningful probability analysis to be conducted. With regard to
heat pumps, costs should be collected for achieving different HSPF
levels in addition to providing costs at different SEER levels. ACEEE
and OOE stated that verification of the costs submitted is extremely
important and they suggest that DOE staff members or consultants be
permitted to inspect raw data in order to ascertain its reasonableness.
OOE suggested that a reverse engineering or design option approach be
used to verify the cost data, although they prefer the design option
approach. ACEEE also contended that a design approach could be used to
verify cost data. ACEEE stated that it is more important to verify
costs submitted for high-efficiency equipment (14 to 15 SEER) as
current market prices do not reflect mature market costs. Both the
Consortium for Energy Efficiency and the Pacific Gas and Electric
Company (PG&E) supported ACEEE's conditions for adopting the
efficiency-level approach (CEE, #6; PG&E, #8). In addition, PG&E
believed that the cost of efficiency upgrades for heat pumps will be
similar to air conditioners since their components are nearly identical
(PG&E, #8).
On the issue of cost verification, one industry representative
contended that if industry provided disaggregated cost data it would
allow for the determination of the sources of the data and, thus,
result in violation of anti-trust laws. (Jim Crawford, Trane,
Transcript, pp 70-72) In any case, he stated that if the reverse
engineering approach were used and it validated the aggregated industry
cost-efficiency curve the issue of cost verification would be a moot
point.
The Department selected two approaches, one of which was the
efficiency-level approach, for conducting the Engineering Analysis.
Specific efficiency levels were selected by the Department based on
consultations with stakeholders. In the case of central air
conditioners, efficiency levels were based upon SEER. Efficiency levels
for heat pumps were based upon both the cooling season SEER and the
heating season HSPF efficiencies.
ARI collected data from individual manufacturers and, rather than
providing only costs at the 90th percentile, submitted minimum,
maximum, and shipment-weighted mean incremental manufacturer costs for
five distinct efficiency levels (11, 12, 13, 14, and 15 SEER). ARI also
provided incremental manufacturer costs for heat pumps for the same
five SEER levels. Since heat pumps are also rated for their heating
performance using the HSPF efficiency descriptor, the Department
developed a simple relationship between the two efficiency descriptors
for purposes of setting an HSPF standard in addition to an SEER
standard. The Department assumed the following set of heating seasonal
performance factors corresponding to the above five SEER levels: 7.1,
7.4, 7.7, 8.0, and 8.2 HSPF).
Tables 2 to 5 show the incremental manufacturer costs, also called
manufacturer cost multipliers, which ARI submitted for the four primary
product classes for systems with cooling capacities of approximately 3
tons (36,000 Btu/hr). The manufacturer cost multipliers are used
together with the baseline manufacturer cost (which will be presented
in Section II.C.2.b.) to determine the manufacturer costs for each
efficiency level. For example, the mean manufacturer cost multiplier
for an 11 SEER split system air conditioners from Table 2 is 1.16 and
the baseline manufacturer cost for a split system air conditioner is
$454. Thus, the mean manufacturer cost for an 11 SEER split system air
conditioner is the product of the baseline manufacturing cost ($454)
and the cost multiplier (1.16), or $527. While the manufacturer cost
multipliers in Tables 2 to 5 included low and high values as well as
mean values, because the probability distribution for the cost data at
a given standard level are unknown, only the mean values were
subsequently used in the LCC Analysis (section II.D).
Table 2.--Split System Air Conditioners--ARI Manufacturer Cost
Multipliers
------------------------------------------------------------------------
SEER Low Mean High
------------------------------------------------------------------------
10........................................... ....... 1.00 .......
11........................................... 1.03 1.16 1.30
12........................................... 1.09 1.36 1.55
13........................................... 1.30 1.63 1.90
14........................................... 1.60 2.03 3.00
15........................................... 1.81 2.40 3.50
------------------------------------------------------------------------
Table 3.--Split System Heat Pumps--ARI Manufacturer Cost Multipliers
------------------------------------------------------------------------
SEER/HSPF Low Mean High
------------------------------------------------------------------------
10/6.8.......................................... ...... 1.00 ......
11/7.1.......................................... 1.05 1.10 1.15
12/7.4.......................................... 1.11 1.24 1.35
13/7.7.......................................... 1.17 1.44 1.66
14/8.0.......................................... 1.30 1.64 1.88
15/8.2.......................................... 1.75 2.09 2.52
------------------------------------------------------------------------
Table 4.--Single Package Air Conditioners--ARI Manufacturer Cost
Multipliers
------------------------------------------------------------------------
SEER Low Mean High
------------------------------------------------------------------------
10........................................... ....... 1.00 .......
11........................................... 1.03 1.19 1.27
12........................................... 1.15 1.30 1.40
13........................................... 1.40 1.63 1.75
14........................................... 1.59 1.87 2.00
[[Page 66314]]
15........................................... 1.89 2.23 2.92
------------------------------------------------------------------------
Table 5.--Single Package Heat Pumps--ARI Manufacturer Cost Multipliers
------------------------------------------------------------------------
SEER/HSPF Low Mean High
------------------------------------------------------------------------
10/6.8.......................................... ...... 1.00 ......
11/7.1.......................................... 1.06 1.14 1.25
12/7.4.......................................... 1.06 1.28 1.50
13/7.7.......................................... 1.45 1.60 1.90
14/8.0.......................................... 1.65 1.75 2.30
15/8.2.......................................... 1.93 2.13 2.47
------------------------------------------------------------------------
In response to EEI's comment that the Engineering Analysis should
include the impact of any standard on the EER rating of the equipment
(EEI, #2), the Department plans on conducting a Utility Impact Analysis
for the Notice of Proposed Rulemaking (NOPR). The Utility Impact
Analysis will capture the peak power impacts of an increased SEER
standard, which EEI is alluding to in their comment regarding the EER.
ii. Reverse Engineering Analysis
As mentioned in the previous section, a reverse engineering
approach was conducted in parallel with the efficiency-level approach
to validate the ARI production cost data. The use of a component-based
technology-costing (reverse engineering) approach provides useful
information including the identification of potential technological
paths manufacturers could use to achieve increased product energy
efficiency. Under this type of analysis, actual equipment on the market
is physically analyzed, i.e., dismantled, component-by-component to
determine what technologies and designs manufacturers employ to
increase efficiency. Independent costing methods or manufacturer and
component supplier data are then used to estimate the costs of the
components. This approach has the distinct advantage of using ``real''
market equipment to establish the technologies which manufacturers use
as the basis for estimating the cost to reach higher efficiencies.
The primary disadvantage of reverse engineering is the time and
effort required to analyze ``real'' equipment. Several models from a
diverse range of manufacturers may have to be assessed in order to
ensure that an accurate representation of technological paths for
increasing efficiency are identified. In addition, since only equipment
in the market is analyzed, prototypical designs may not be captured by
the analysis, thus making it difficult to establish maximum
technologically feasible designs.
The industry contends that a reverse engineering approach could be
used to verify the cost data submitted through the efficiency-level
approach but DOE must first define the acceptable level of variability
between the costs that are developed through each approach. (Jim
Crawford, Trane; David Lewis, Lennox, pp 110-113) Industry also
maintained that there is wide variation in production costs between
manufacturers due to the levels of services that are provided with the
purchase of the equipment. OOE stated that reverse engineering could be
used to validate the efficiency approach (OOE, #7) while ACEEE stated
that reverse engineering has the benefit of analyzing advanced
technologies. (Steven Nadel, ACEEE, pp 80-81)
The Department carried out the reverse engineering approach to
validate the cost estimates provided by ARI from the efficiency-level
approach. The manufacturer costs of 71 equipment models at eight
efficiency levels were estimated. Three 3-ton models were torn down:
(1) A 10 SEER split system cooling-only condenser, (2) a 10 SEER
packaged heat pump, and (3) a 12 SEER split system heat pump condenser.
Manufacturer submissions, catalog data, and the ARI Product Attributes
Database provided design information on the other 68 models. For split
system air conditioners, cost estimates were developed for whole-number
efficiency levels ranging from 10 to 17 SEER. For split system heat
pumps, cost estimates were developed for whole-number efficiency levels
ranging from 10 to 16 SEER. The heating efficiencies corresponding to
each of the whole-number SEER levels were: 6.8 HSPF for 10 SEER, 7.1
HSPF for 11 SEER, 7.4 for 12, 7.7 for 13, 8.0 for 14, 8.2 for 15, and
8.4 for 16. A limited set of models were analyzed for single package
systems. For single package air conditioners cost estimates were
developed for 10, 12, and 13 SEER efficiency levels while for single
package heat pumps cost estimates were developed for 10 SEER/6.8 HSPF
and 12 SEER/7.4 HSPF efficiency levels.
Tables 6 to 9 show the manufacturer cost multipliers developed by
reverse engineering for the four primary product classes. Probability
distributions rather than single point-values were used in the LCC
analysis. The low and high values shown in the following represent the
10th and 90th percentiles, respectively, of the distributions.
Table 6.--Split System Air Conditioners--Reverse Engineering
Manufacturer Cost Multipliers
------------------------------------------------------------------------
SEER Low Average High
------------------------------------------------------------------------
10........................................... 0.96 1.00 1.05
11........................................... 1.08 1.13 1.18
12........................................... 1.20 1.25 1.31
13........................................... 1.35 1.42 1.48
14........................................... 1.65 1.73 1.81
15........................................... 1.87 1.95 2.04
16........................................... 1.98 2.07 2.17
17........................................... 2.13 2.23 2.33
------------------------------------------------------------------------
Table 7.--Split System Heat Pumps--Reverse Engineering Manufacturer Cost
Multipliers
------------------------------------------------------------------------
SEER/HSPF Low Average High
------------------------------------------------------------------------
10/6.8......................................... 0.96 1.00 1.05
11/7.1......................................... 0.97 1.01 1.06
12/7.4......................................... 1.05 1.10 1.15
13/7.7......................................... 1.29 1.35 1.41
14/8.0......................................... 1.57 1.65 1.72
15/8.2......................................... 1.79 1.87 1.96
16/8.4......................................... 1.92 2.01 2.10
------------------------------------------------------------------------
Table 8.--Single Package Air Conditioners--Reverse Engineering
Manufacturer Cost Multipliers
------------------------------------------------------------------------
SEER Low Average High
------------------------------------------------------------------------
10........................................... 0.96 1.00 1.05
11........................................... ....... ....... .......
12........................................... 1.08 1.14 1.19
13........................................... 1.33 1.40 1.46
------------------------------------------------------------------------
Table 9.--Single Package Heat Pumps--Reverse Engineering Manufacturer
Cost Multipliers
------------------------------------------------------------------------
SEER/HSPF Low Average High
------------------------------------------------------------------------
10/6.8......................................... 0.96 1.00 1.05
11/7.1......................................... ...... ....... ......
12/7.4......................................... 1.11 1.16 1.22
------------------------------------------------------------------------
iii. Design Option Approach
Industry representatives contended that the design option approach
can only be conducted by industry personnel with years of experience,
but the industry is not willing to provide this expertise because of
the expense involved. (Jim Crawford, Trane; David Lewis, Lennox; Ted
Leland, ARI, Transcript, pp105-106) The industry also stated that DOE
should not provide funds for others to carry out this
[[Page 66315]]
approach because they lack the necessary expertise.
In contrast, ACEEE and OOE believe that the design option approach
has merits (Steven Nadel, ACEEE, Transcript, p 108; OOE, #7). ACEEE
stated that it can be useful for evaluating new technologies, while OOE
believes it is the approach of choice for conducting the Engineering
Analysis, since the impact of any single technology on cost and
efficiency is explicitly stated.
The Department used only the efficiency level and reverse
engineering approaches to establish the manufacturer costs of achieving
increased efficiency levels for the following reasons: (1) Central air
conditioners and heat pumps are complex products; (2) a wide variety of
options exist to improve their efficiency; (3) these options interact
in complex ways; and (4) the industry strongly opposed use of the
design option approach and was willing to provide data for the
efficiency-level approach.
iv. Outside Regulatory Changes Affecting the Engineering Analysis
There sometimes occur regulatory changes outside of the EPCA
efficiency standards process that can affect the manufacture of a
product. In some cases, such changes affect the energy efficiency of a
product. The Department has attempted to identify all regulatory issues
outside the efficiency standards process that would influence the
Engineering Analysis.
The central air conditioning and heat pump industry faces the
impending phase-out of HCFC-22, the refrigerant used in almost all the
equipment currently being installed in the U.S. The phase-out of HCFC-
22 begins in the year 2010, and the industry has responded by
conducting in-depth analyses of various HCFC-22 alternatives. The most
notable effort to date has been the ARI's Alternative Refrigeration
Evaluation Program (AREP). Under AREP, several HCFC-22 alternatives
were identified, and their effects on equipment capacity, efficiency,
and longevity, and other variables were established.
Two primary candidates have emerged from the field of alternatives:
R-410A and R-407C. Although R-410A shows promise of being able to
significantly raise equipment efficiencies, its high volumetric
capacity requires systems to be redesigned to handle the significantly
higher discharge pressures. R-407C is a virtual drop-in replacement,
but results in an efficiency degradation of 5-10% relative to HCFC-22.
In response to the issue of alternative refrigerants for HCFC-22,
industry representatives stated that manufacturing costs that will be
submitted will attempt to factor in the impact of switching to R-410A.
(Ted Leland, ARI, Transcript, pp 287-288; Jim Crawford, Trane, p 288;
David Lewis, Lennox, p 290, p 297) In response to a schedule presented
at the 1998 Framework Workshop showing that a new minimum standard
would become effective in the year 2005, the industry representatives
stated that the effective date of any new efficiency standard should
coincide with the phase-out date of HCFC-22 (the year 2010) or be in
the 2006 to 2010 time frame. Additionally, they warned that efficiency
gains through the use of R-410A are not as great as first believed.
In response to industry's proposal to postpone the effective date
of the standard, both ACEEE and OOE stated that DOE should make new
standards effective in 2005. (ACEEE, #5; OOE, #7; Steven Nadel, ACEEE,
Transcript, p 298; PG&E, #8) In their view, any delay will compromise
U.S. commitments to reduce global warming gases. OOE offers two
approaches for completing the rulemaking on-schedule: (1) Base the
rulemaking analysis on replacement refrigerants or (2) base the
analysis on HCFC-22 and use a correction factor to adjust equipment
performance based on the use of alternative refrigerants. PG&E adds
that an effective date of 2005 will allow any new building standards
proposed by the California Energy Commission (CEC) to include the
beneficial impact of higher-efficiency air conditioners. PG&E states
that if standards are delayed to 2010, then over 500,000 new California
dwellings would be significantly less efficient.
The Department has determined that the phase-out date for HCFC-22
is far enough in the future that it will not affect a manufacturer's
ability to meet any new efficiency standards, whether using HCFC-22
before the phase-out, or using alternative refrigerants before and
after the phase-out. The Department does not plan to delay the
effective date of any new standards to coincide with the phase-out date
of HCFC-22. The Engineering Analysis has therefore been based on the
assumption that equipment will use HCFC-22. However, the Department
recognizes that equipment design changes to accommodate alternate
refrigerants may alter the manufacturing cost-efficiency relationship
developed for HCFC-22 equipment. The Department welcomes input
regarding the analysis of equipment designed for alternate
refrigerants.
Other non-regulatory issues of concern to the industry include the
need to make systems increasingly tighter to prevent refrigerant leaks
due to the use of HCFC-based refrigerants (David Lewis, Lennox,
Transcript, p 298), and international standardization of test
procedures. (Jim Crawford, Trane, Transcript, pp 298-299). The
Department has not explicitly addressed these concerns in its current
analysis but welcomes any comments as to how to address these issues in
the course of the rulemaking.
2. Manufacturing Costs
a. General
In addition to being inputs to the Engineering Analysis,
manufacturing costs are used as the means of determining retail prices,
and are needed for the manufacturer impact analysis.
b. Product Specific
Two sets of manufacturing costs were prepared. Using an efficiency-
level approach, ARI collected data from individual manufacturers and
submitted incremental manufacturing cost estimates. The Department also
conducted a reverse engineering analysis to determine manufacturing
costs. This analysis included an assessment of uncertainty and
variability among manufacturers.
Baseline manufacturer costs, i.e., the costs associated with
producing equipment with efficiencies of 10 SEER, were also developed
through the reverse engineering analysis. Table 10 shows the baseline
manufacturer costs developed for the four primary product classes for
systems with cooling capacities of approximately 3 tons (36,000 Btu/
hr). Note that for split system air conditioners, two costs were
developed; one for systems sold without indoor blowers and the another
for systems sold with indoor blowers. (A split system air conditioner
is usually sold without an indoor blower when the air conditioner's
indoor unit is installed in conjunction with a heating furnaces that is
equipped with a blower). The uncertainty and variability of the
baseline costs are noted in the manufacturer cost multipliers derived
in the reverse engineering analysis (Tables 6 to 9) in the rows
identified as 10 SEER/6.8 HSPF.
Table 10.--Baseline Manufacturer Costs
------------------------------------------------------------------------
Without With
Product Class blower blower
------------------------------------------------------------------------
Split System A/C.................................... $367 $454
[[Page 66316]]
Split System Heat Pump.............................. ........ 615
Single Package A/C.................................. ........ 534
Single Package Heat Pump............................ ........ 589
------------------------------------------------------------------------
i. Characterizing Uncertainty
Consistent with the Process Rule, DOE places a range around the
average manufacturing costs of achieving various efficiency levels. The
OOE concurs with DOE's plan for dealing with uncertainty and
variability in manufacturer cost estimates. (OOE, #7) The ranges of
costs are used to generate retail prices for the consumer LCC Analysis,
and are used in the Industry Cash Flow Analysis.
ARI collected data from manufacturers and developed a shipment-
weighted mean, along with minimum and maximum cost multipliers for each
efficiency level to account for variability and uncertainty. Since the
actual distribution of manufacturer costs were not provided to the
Department, only the shipment-weighted means were used in the
calculation of retail prices and, in turn, the LCCs.
In conducting the reverse engineering approach, the Department
developed a range of cost estimates for each efficiency level. For each
efficiency level in each product class, the range of cost estimates
were approximated by multiplying the mean value by a uniform
distribution (from 95% of the mean to 105% of the mean) and a normal
distribution (centered on the mean, with a standard deviation of 1.9%).
The resulting cost distributions were then used in the calculation of
retail prices and, in turn, the LCCs.
ii. Variability in Cost Among Manufacturers
The Department is committed to assessing the differential impacts
of standards on different manufacturers. The results are used as inputs
for the sub-group analysis of manufacturing impacts, which entails
calculating cash flows separately for each class of manufacturer.
In previous analyses for other appliances, manufacturing costs
submitted to DOE have demonstrated large variability. In line with the
Department's preference, ARI therefore collected cost data
disaggregated by manufacturer, although, as discussed earlier, ARI
provided to the Department only aggregated shipment-weighted
manufacturer costs. Under the efficiency-level approach, this same
disaggregated company-specific cost information developed for the
Engineering Analysis can be used to perform Government Regulatory
Impact Analysis for each manufacturer or manufacturer subgroup. These
aggregated data, however, were insufficient to generate distributions
of costs by manufacturer. Therefore, only mean values were used in the
subsequent LCC Analysis.
iii. Proprietary Design
The Department considers in its analysis all design options that
are commercially available or present in a working prototype, including
proprietary designs. OOE stated that designs meeting the stated
criteria of a proprietary design should be analyzed as a design option,
providing the example of the microchannel heat exchanger (OOE, #7).
Proprietary designs are considered in the Department's engineering and
economic analyses. The Department looked at the potential impact of
proprietary heat exchanger and compressor designs plus any proprietary
designs that were part of equipment which were analyzed in the course
of the reverse engineering analysis.
The Department considered the potential impact of proprietary
designs as part of its preliminary assessment of design options. Its
initial conclusion is that the inclusion of proprietary designs will
not materially affect the results of the Engineering Analysis because
equipment can achieve the same efficiencies competitively using non-
proprietary designs. The Department intends to continue examining this
issue during the Manufacturing Impact Analysis and welcomes input on
the appropriateness of considering proprietary designs.
D. Life-Cycle Cost (LCC) and Payback Analysis
In determining economic justification, EPCA directs the Department
to consider a number of different factors, including the economic
impact of potential standards on consumers. EPCA also establishes a
rebuttable presumption that a standard is economically justified if the
additional cost of purchasing a product, attributed to the standard, is
less than three times the value of the first year energy cost savings.
EPCA, section 325(o)(2)(B)(iii), 42 U.S.C. 6295 (o)(2)(B)(iii).
To address these provisions the Department calculates changes in
LCCs to the consumers that are likely to result from the proposed
standard, as well as two different simple payback periods, i.e.,
distribution of payback periods, and a payback period calculated for
purposes of the rebuttable presumption clause. The effects of standards
on individual consumers include changes in operating expenses (usually
lower) and changes in total installed cost (usually higher). The net
effect is analyzed by calculating the change in LCC as compared to the
base case. The base case manufacturing cost is determined in the
reverse engineering analysis. The LCC calculation considers installed
consumer cost (equipment purchase price plus installation cost),
operating expenses (energy, repair, and maintenance costs), appliance
lifetime, and discount rate. The LCC Analysis is performed from the
perspective of the consumer.
At the ANOPR stage, the Department generates LCC and payback period
results as probability distributions using a simulation based on Monte-
Carlo methods, in which inputs to the analysis consist of probability
distributions rather than single-point values. As a result, the Monte
Carlo analysis produces a range of LCC and payback period results
rather than single-point values. A distinct advantage of this type of
approach is that the percentage of consumers achieving LCC savings or
attaining certain payback values due to an increased efficiency
standard can be identified in addition to the average LCC savings or
average payback for that standard. Because the analysis is being
conducted in this manner, the uncertainties associated with the various
input variables (as described in the next paragraph) can be expressed
as probability distributions. During the post-ANOPR consumer analysis,
the Department will evaluate additional parameters, and prepare a
comprehensive assessment of the impacts on sub-groups of consumers.
The LCC and one of the payback periods (distribution of payback
periods) are calculated using the LCC spreadsheet model developed in
Microsoft Excel for Windows 95, combined with Crystal Ball (a
commercially available software program), based on probability
distributions of input variables. The second payback, the Rebuttable
payback based on DOE test procedure assumptions for estimating annual
energy consumption, is not calculated using Crystal Ball and input
probability distributions, but is instead based on the spreadsheet
option allowing single-values for the input variables.
[[Page 66317]]
Based on the results of the Engineering and LCC Analyses, DOE
selects candidate standard levels for a more detailed analysis. The
range of candidate standard levels typically includes: (1) The most
energy-efficient combination of design options or most energy-efficient
level; (2) the efficiency level with the lowest LCC; and (3) an
efficiency level with a payback period of not more than three years.
Additionally, candidate standard levels that incorporate noteworthy
technologies or fill in large gaps between efficiency levels of other
candidate standards levels may be selected.
The payback, for purposes of the rebuttable presumption test,
attempts to capture the payback to consumers affected if a new standard
is promulgated. It compares the purchase cost and energy use of central
air conditioners and heat pumps consumers would buy in the year the
standard becomes effective with what they would buy without a new
efficiency standard. In some cases, this means comparing the baseline
energy efficiency and cost with those associated with the standard
level. In other cases, the standard level would also be compared to a
higher-efficiency appliance purchased without new standards (but at a
lower efficiency than the trial standard level). A weighted average of
these payback periods, in the year a new standard level would take
effect, is considered the payback for purposes of the rebuttable
presumption clause.
In addressing the usefulness of the LCC Analysis, an industry
representative asserted that LCCs have no relationship to market
dynamics, have no relationship to what the customer will buy, and have
no relationship to the cost effectiveness of any efficiency standard.
(Jim Crawford, Trane, Transcript, pp 135) But section
325(l)(2)(B)(I)(II) of EPCA requires the Department to consider the
savings and costs of standards, and virtually mandates performance of
an LCC Analysis.
One commenter during the Framework Workshop stated that tax credits
[incentives] for consumer purchases of high efficiency equipment should
be included in the LCC Analysis. (Transcript, pp 243) The Department
has not considered tax incentives in the LCC Analysis being presented
here, because there are no such tax benefits available under Federal
law. However, the Department seeks specific information from
stakeholders regarding whether the Department should consider LCC
analyses with alternative tax incentive scenarios.
1. LCC Spreadsheet Model
a. General
This section describes the LCC spreadsheet model used for analyzing
the economic impacts of possible standards on individual consumers. The
LCC spreadsheet model is available on the Department's web site for use
by interested parties who wish to modify the assumptions in the models
and view the results of those changes. The LCC Analysis is conducted
using a spreadsheet model developed in Microsoft Excel for Windows 95,
combined with Crystal Ball. The Model uses a Monte Carlo simulation to
perform the analysis considering uncertainty and variability. The
spreadsheet is organized so that ranges (distributions) can be entered
for each input variable needed to perform the calculations.
The Department wishes to consider the impacts of varying regional
climate, energy prices, and consumer behavior on LCCs and payback
periods. Calculations were therefore based on a Monte Carlo uncertainty
analysis in which variables are represented by probability
distributions of values. With this approach, the Department could
express LCCs and payback periods as national means, with ranges that
fully account for regional variations in climate, electricity cost, and
behavior. The spreadsheet has the capability to sample subsets of
households for the analysis of particular sub-populations, e.g., low
income households, and will be used for Consumer Sub-Group Impact
Analysis prior to issuance of the NOPR.
An industry representative commented that an LCC Analysis based
upon uncertain or distributional inputs is suspect and totally
unverifiable if the uncertainty of the inputs cannot be clearly
defined. (Jim Crawford, Trane, Transcript, pp 252-254) He suggested
that a simpler approach be used. Others supported the use of a
distributional LCC Analysis, commenting that this approach is better
than what has been used in prior rulemakings. (Charles Stephens, OOE;
Michael Martin, CEC, Transcript, pp 256) EEI stated that the use of
ranges of values for appliance price and life, fuel costs, energy
usage, and discount rates follows recommendations provided by the
Appliance Standards Advisory Committee. (EEI, #2) OOE asserts that use
of a distributional analysis creates potential pitfalls in accounting
for regional climatic and energy price variations. Use of traditional
methods for screening out design options based upon increased LCC or
excessively long payback periods will be more difficult as results for
one region may demonstrate that a design option is economically
attractive while another region does not. DOE must establish some basis
for rejecting or retaining design improvements. (OOE, #7) Although the
use of distributional LCC Analysis may be more complex, the Department
has decided it is the best approach to use to capture the uncertainty
and variability inherent in input variables. In response to OOE's
concerns for selecting appropriate standard levels, the Department will
keep in mind their concerns when selecting appropriate standard levels
for the NOPR.
In order to generate the distributions required for the analysis,
the Department used the Energy Information Administration's (EIA's)
Residential Energy Consumption Survey (RECS). The 1993 RECS is based on
a representative sample of 7,111 households from the population of all
primary, occupied residential housing units in the United States. Each
household is weighted so that the data properly represent the 96.6
million households in the 50 states and the District of Columbia
reported in the 1993 RECS.
RECS estimates end-use energy consumption and reports the age of
equipment as well as household energy prices. Of the over 7,000
households surveyed in RECS, 2550 households representing 35.6% of the
housing population have a central air conditioner while 651 households
representing 8.3% of housing population have an electric heat pump. The
distribution of LCC and payback results are generated by performing an
LCC and payback calculation for each RECS household with a central air
conditioner or heat pump. For example, in conducting the LCC Analysis
for a 12 SEER standard level for central air conditioners, all RECS
households with a central air conditioner have their existing equipment
``replaced'' first with a baseline (i.e.,10 SEER) system. The
corresponding LCCs of the baseline systems are then calculated. Then
all RECS households with a central air conditioner have their existing
equipment ``replaced'' with a 12 SEER system and the LCC of these
systems are established. On a household-by-household basis, the payback
periods and the LCC differences of the 12 SEER system are determined
relative to the economics of the baseline system. The result is a
distribution of LCCs and payback periods. Since climatic conditions and
consumer behavior affect the energy consumption of a given
[[Page 66318]]
piece of equipment, these data implicitly account for regional
variations. Similarly, variations in the RECS energy price data
represent the range faced by consumers in the U.S.
Both EEI and EMPA warned of problems using the RECS data in a LCC
and Payback Analysis. (EEI, #2; EMPA, #3) EEI asserts the following:
(1) The age of the RECS data (1993) is too old to be used with
efficiency and price data from 1998, (2) only total annualized average
electricity and fuel rates rather than summer marginal rates are
provided, (3) the stated age of the equipment may be inaccurate if the
households surveyed are not original homeowners, and (4) there is no
accounting of equipment used in small commercial facilities. EEI also
claims that RECS may not reflect regional or national equipment
saturations as the 1993 RECS shows that 42% of survey homes have a
central air conditioner while an industry publication (ACHR News, June
22, 1998) shows saturations ranging from 55% in the western U.S. to 99%
in the southern U.S. EMPA questioned whether the 7,000 to 8,000
households surveyed households in RECS can be representative of the 90
million households in the U.S. They also commented that RECS experts
from EIA needed to provide a written statement in support of the way in
which DOE plans to use the RECS data in its LCC analyses. In contrast
to these comments, OOE states that they are very comfortable with the
analysis methodology as it was applied to other products (clothes
washers) where RECS data was used to determine annual energy use and
equipment age. (OOE, #7)
Although the Department understands the concerns of the EEI and
EMPA, the 1993 RECS data is the most recent and appropriate database
available for conducting the desired distributional LCC Analysis. DOE
plans to conduct updates to the LCC and Payback Period Analysis with
the 1997 RECS. Use of this data will address most of the concerns
brought up by both EEI and EMPA.
Estimates of the efficiency of equipment currently in use are based
upon the age of the equipment as established by RECS and historical
shipment-weighted efficiency values. The age of the equipment
establishes the year of manufacture which in turn, using the shipment-
weighted efficiency data, allows for the determination of the
equipment's most probable efficiency. Replacing existing equipment with
new equipment results in reductions in energy consumption. These
reductions were approximated by multiplying current energy use by the
ratio of the efficiencies of existing and new equipment. Using an
energy price allowed for the calculation of the operating costs of
existing and new replacement equipment, and, in turn, the LCCs and
payback periods associated with different efficiency levels of new
equipment.
The Department developed LCCs and payback periods based on both
sets of manufacturer cost estimates developed in the Engineering
Analysis: (1) The ARI cost data developed through the efficiency-level
approach, and (2) the cost data developed through the reverse
engineering analysis.
A more detailed description of the methodology and contents of the
RECS database is contained in the Preliminary TSD.
b. Product Specific
This section discusses the approaches for analyzing the economic
impacts on individual consumers from potential new central air
conditioner and heat pump standards. An LCC spreadsheet model,
described previously in Section II.D.1.a, is used to calculate two of
the economic impacts, LCC and payback period, based on input variables
that have uncertainty and variability expressed with probability
distributions. A third economic impact, Rebuttable Payback Period, is
determined without the use of the spreadsheet model. In future
analyses, all three of these economic metrics will be compared to
baseline efficiencies of appliances sold in the year the new standard
would take effect. In this preliminary analysis, only the Rebuttable
Payback Period is compared to a distribution of efficiencies forecasted
to the year 2006.
i. LCC Analysis
The Department determined values of input variables for central air
conditioners and heat pumps, including total installed cost (consisting
of both the equipment purchase price and installation price), annual
energy use, lifetime, repair costs, and maintenance costs of equipment,
as well as average energy prices, marginal energy prices, and discount
rate. Table 11 summarizes some of the major assumptions used to
calculate the consumer economic impacts of various energy-efficiency
levels.
Table 11.--Assumptions Used in the LCC Analysis
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Total Installed Cost: Equipment Purchase Price......... Manufacturer cost multiplied by manufacturer markup,
distributor markup, dealer markup, and sales tax.
Installation Price................................. Central air conditioners--$1190; heat pumps--$2035.
Existing Equipment Efficiency.......................... Distribution imputed from RECS database based on
equipment age and historical shipment-weighted
efficiencies (central air conditioners--5.3 to 15.2
SEER, weighted average of 8.58 SEER; heat pumps--5.3
to 15.2 SEER, weighted average of 8.72 SEER; 4.88 to
9.67 HSPF, weighted average of 6.52 HSPF).
Existing Annual Energy Use............................. Distribution from RECS database (central air
conditioners--174 to 12,929 kWh/yr, weighted average
of 2629 kWh/yr; heat pumps--space-cooling equals 0 to
14,771 kWh/yr, weighted average of 2987 kWh/yr; space-
heating equals 162 to 29,839 kWh/yr, weighted average
of 4658 kWh/yr).
Average Energy Prices.................................. Historical--distribution from RECS database (central
air conditioners--2.70 to 16.50 cents/kWh, weighted
average 8.49 cents/kWh; heat pumps--2.60 to 13.00
cents/kWh, weighted average 7.86 cents/kWh);
projections--AEO--1999.
Marginal Energy Prices................................. Historical--estimated from RECS database (central air
conditioners--0.58 to 19.42 cents/kWh, weighted
average 8.74 cents/kWh; heat pumps--0.82 to 18.62
cents/kWh, weighted average 7.99 cents/kWh);
projections--scaled to trends in average energy
prices.
Lifetime............................................... Distribution based on empirical data (mean life is 18.4
years).
Discount Rate.......................................... Distribution (0% to 19%, weighted average 6.51%)
Repair Costs........................................... For systems with efficiencies of 10 SEER or greater
than 12 SEER, one-half equipment price divided by mean
lifetime. For systems with efficiencies of 11 or 12
SEER, 1% greater than the 10 SEER repair cost.
Maintenance Costs...................................... Distribution ($0 to $135/year, weighted average $36/
year).
----------------------------------------------------------------------------------------------------------------
[[Page 66319]]
Total Installed Cost: The total installed cost consists of the
equipment purchase price and the installation price. Markups are used
to convert the manufacturer cost to the equipment purchase price. The
determination of equipment purchase prices is described in the next
section.
Installation Price: The installation price represents all costs
required to install the equipment other than the marked-up equipment
cost. The installation price includes labor, overhead, and any
miscellaneous materials and parts such as linesets. For central air
conditioners the installation price used in the analysis used is $1190,
and for heat pumps it is $2035. The installation price was determined
by subtracting the derived equipment purchase price from the typical
total installed cost. The typical total installed cost values were
collected from public sources and phone calls to heating ventilating
and air conditioning (HVAC) contractors. While the data collected were
for split systems, the Department has assumed the installation prices
apply to single package systems, although installation price for these
systems might be somewhat lower than for the split systems, since only
single packages are involved and no line sets are required. The
Department is interested in obtaining information on the installation
prices for all classes of products.
Annual Energy Use: Currently, the DOE test procedure calculates
annual cooling and heating energy consumption based on 1,000 and 2,080
hours of operation, respectively. Although this procedure seems to be
widely accepted for comparing the seasonal performance of different
units, the procedure overstates equipment energy use compared to RECS
estimates. As described above, basing operating and LCC on RECS
household data provides a more accurate measure of the savings possible
from more-efficient equipment, and accounts for variability in LCCs due
to climatic conditions and energy prices.
Variations in energy use for a particular appliance can depend on
factors such as climate, type of household, people in household, etc.
For purposes of this analysis, annual energy use was based on the
annual end-use energy consumption values in RECS. Climatic and consumer
behavior are inherent to the RECS energy use data. The Department will
perform sensitivity analyses prior to issuance of the NOPR to consider
how differences in energy use will affect sub-groups of consumers.
For the RECS households with central air conditioners, the range of
annual space-cooling energy consumption is 174 to 12,929 kWh/year with
a weighted-average value of 2629 kWh/year. For the RECS households with
heat pumps, the range of annual space-cooling energy consumption is 0
to 14,771 kWh/year with a weighted-average value of 2987 kWh/year. The
annual space-heating energy consumption for households with heat pumps
ranges from 162 to 29,839 kWh/year with a weighted-average value of
4658 kWh/year.
For each RECS household equipped with either a central air
conditioner or heat pump, the annual energy use associated with a
particular standard level is calculated by taking the annual energy use
associated with the existing system and multiplying it by the ratio of
the existing system's efficiency to the efficiency of the standard
level of interest. To illustrate this approach, this calculation
procedure is carried out here based on the weighted-average annual
energy use and the weighted-average efficiency from all RECS households
equipped with central air conditioners. As presented earlier, for all
RECS households with a central air conditioner, the weighted-average
annual energy use and the weighted-average efficiency are 2629 kWh/year
and 8.58 SEER, respectively. Thus, for the case of a 12 SEER air
conditioner, the weighted-average annual energy use is determined
according to the following expression:
Weighted-average annual energy use of 12 SEER A/C = 2629 kWh/yr 4 x
(8.58 SEER 12 SEER) = 1880 kWh/yr
Of course, as the efficiency of the standard level being analyzed
increases, its corresponding annual energy use decreases
proportionally. It should be noted that in the case of establishing the
annual space-heating energy use of heat pumps, the ratio of HSPF values
are used rather than the SEER values. It must also be emphasized that
the above calculation is illustrative only. In order to generate the
distribution of LCC and payback results for a particular standard
level, each RECS household that is equipped with a central air
conditioner or heat pump is analyzed.
Concerning use of RECS data in the economic analysis, EEI stated
that, although energy use is dependent on equipment design, weather,
and consumer operation, it is also a strong function of house design,
landscape, and thermostatic controls, and their impacts should be taken
into consideration. (EEI, #2) They also stated that EER ratings, in
addition to SEER ratings, ranges of cooling capacity, and the climatic
impact on hours of operation, should also have an impact on energy use
and should also be considered. With regard to the annual operating
hours, EEI stated that a range of values based upon end-use metering
studies, load management programs, and other utility or research
organization studies should be used. They cited state utility
commissions, Internet web sites, and software providers as possible
sources for determining variations on energy use.
As stated earlier, the Department believes that the 1993 RECS is
the most recent and appropriate data available. In addition to the
equipment design, weather, and consumer operation, the RECS annual end-
use estimates also consider the household's shell characteristics
including any prominent shading. Past RECS data sets have been
validated against end-use metering studies in an attempt to better its
procedures for estimating end-use energy consumption. Although the
Department is comfortable with the use of RECS as its source for
establishing annual energy consumption, interested parties are welcome
to present any metered end-use data that could verify or substitute for
the RECS estimates.
Average Energy Prices: As discussed above, the Department is using
RECS household data to establish energy prices. Projections of future
energy prices for the LCC Analysis use high, low, and reference case
projections of national average electricity prices to residential
customers. The current edition of EIA's Annual Energy Outlook (AEO) is
used as the source of projections for uncertainty in the LCC analysis.
For the RECS households with central air conditioners, the range of
average electricity prices in 1993$ is 2.70 to 16.50 cents/kWh with a
weighted-average value of 8.49 cents/kWh. For the RECS households with
heat pumps, the range of average electricity prices is 2.60 to 13.00
cents/kWh with a weighted-average value of 7.86 cents/kWh. While
average energy prices establish the annual electricity cost of baseline
equipment (i.e., split-system air conditioners with efficiencies of 10
SEER and heat pumps with efficiencies of 10 SEER and 6.8 HSPF),
marginal energy prices establish savings in electricity costs
associated with increased efficiency standards.
Both EEI and EMPA stated that the average energy prices in RECS are
outdated and that marginal energy prices should be used in their place
in conducting the LCC and Payback Analysis. (EEE, #2; EMPA, #3) Both
[[Page 66320]]
pointed to subtracting out the fixed cost portion of the price as an
interim step in developing marginal prices. EEI suggested several data
sources for developing marginal prices including state utility
commissions, Internet web sites such as the PowerRates site, and
software providers such as such as EPS solutions and Energy
Interactive. EMPA stated that any work to identify marginal energy
costs should include a detailed description of the methodology and that
any data collection efforts must comply with Paperwork Reduction Act.
ACEEE noted how air conditioners are used during peak periods when the
cost of supplying electricity is high and that price data should be
collected during these periods for use in the economic analyses.
(ACEEE, #5)
Regarding future energy prices, several participants at the 1998
Framework Workshop stated that future residential electricity prices
will be dependent on the how the electric utility industry is
restructured. (Transcript, pp 220-230) EMPA was critical of EIA's
forecasts of future energy prices, stating that the forecasts have
consistently underestimated rates, and that EIA's forecasting models do
not reflect the factors resulting from the deregulation of the electric
utility industry. (EMPA, #3)
The Department used the most recent forecasts from the 1999 AEO to
predict the trend in both average and marginal electricity prices by
multiplying the average and marginal price for the base year (1998) by
the AEO's forecasted relative electricity price increases and/or
decreases. In addition, LCC and payback spreadsheets can be run with
price forecasts from the Gas Research Institute (GRI). The Department
believes these forecasts are the most reliable available to predict
future energy trends.
Marginal Energy Prices: Marginal energy prices are those prices
consumers pay for the last units of energy used. Marginal prices
reflect a change in a consumer's bill associated with a change in
energy consumed, consequently, marginal energy prices, rather than
average energy prices, are appropriate for determining energy cost
savings associated with increased efficiency standards. For LCC
analyses, the Advisory Committee recommended that DOE use the full
range of consumer marginal energy prices instead of national average
energy prices. Absent consumer marginal energy price information, the
Committee recommended DOE use a range of net energy prices, calculated
by removing all fixed charges. The Department agrees the use of
marginal energy prices improves the accuracy of the LCC Analysis and
has estimated marginal prices for electricity and natural gas.
The Department estimated consumer marginal electricity and natural
gas prices directly from household data in the 1993 RECS survey by
calculating the slopes of the regression lines of customers' bills vs.
energy consumption for these two fuels. Those slopes are equal to the
change in bill divided by the change in energy consumption, that is,
the marginal prices paid by each household. Since this rulemaking
concerns only energy efficiency standards that apply to electrically-
driven central air conditioners and heat pumps, only marginal
electricity prices are of concern here.
For electricity, the Department calculated separately the slopes of
the regression lines for four summer months (June-September) and for
the remaining (``winter'') months. The annual marginal price was
derived by taking the weighted average of the two seasonal prices,
where the weighting was the relative energy consumption of the
appliance in each season. For air conditioners/heat pumps, the
weighting was based on the regional location and age of each of the
households in the RECS sample.
Given restructuring of parts of the energy supply sector, customers
may have more than one bill (e.g., one from the distribution company,
and one or more from generators or suppliers). To capture complete
information, future surveys would best gather energy pricing
information directly from customers, rather than from utilities or
local distribution companies. Efficient collection of energy pricing
information in the future will require changing the current processing
of the billing information so as to gather consumption by month and
pricing information for each customer from the bills. The pricing
information would comprise the applicable rate schedule, including
marginal prices, fixed charges, and demand charges for commercial and
industrial customers, or time-of-use rates where applicable. The Office
of Energy Efficiency and Renewable Energy has expressed the need for
these data in discussions with EIA concerning the design of future
surveys.
Until a time series of marginal prices is available, the Department
will use projected trends in energy prices to derive estimates of
consumer marginal energy prices for the economic analysis of proposed
standards. An index (scaling factor) was created relative to current
prices from the trend in average prices (by fuel and sector) and was
applied to the current range of marginal prices. For example, if the
trend in average residential electricity prices was a decline by 20
percent over a given period of time, then we assume the marginal price
for each household would decline from its initial observed value by 20
percent over that same period.
The Department recognizes that a simple scaling of marginal energy
prices may be incorrect in a restructured electric power market.
Therefore, the Department may develop a different approach to forecast
future marginal energy prices when restructuring becomes more widely
implemented.
Given the uncertainty of projections, the Department has made
available to stakeholders the ability to conduct a scenario analysis to
examine the robustness of different efficiency levels under different
energy-price conditions. Each scenario provides a self-consistent
projection, integrating energy supply and demand. The scenarios differ
from each other in the energy prices that result. The Advisory
Committee suggested the use of three scenarios. While many scenarios
can be envisioned, the three scenarios specified are sufficient to
bound the range of energy prices.
The three scenarios suggested by the Advisory Committee are based
on projections in the 1999 AEO. The Department's most recent reference
case, published in the 1999 AEO, provides a well-defined middle
scenario. In addition, DOE can use the scenarios with the highest and
lowest energy prices in the sector from the range of scenarios in the
1999 AEO. The future trend in energy prices assumed in each of the
three scenarios is clearly labeled and accessible in each spreadsheet.
Also included as a scenario is the GRI energy price forecast for 1998.
Stakeholders can easily substitute alternative assumptions in the
Department's web site LCC spreadsheets to examine additional scenarios.
For the RECS households with central air conditioners, the range of
marginal electricity prices in 1993 dollars is 0.58 to 19.42 cents/kWh
with a weighted-average value of 8.74 cents/kWh. For the RECS
households with heat pumps, the range of marginal electricity prices is
0.82 to 18.62 cents/kWh with a weighted-average value of 7.99 cents/
kWh.
As discussed previously under the section describing average energy
prices, marginal energy prices are used to determine the annual
electricity costs associated with energy savings resulting from an
increased efficiency standard (i.e., any efficiency above baseline
efficiencies).
Lifetime: In choosing a value for lifetimes of central air
conditioners and
[[Page 66321]]
heat pumps, a variety of sources were reviewed. These studies on
lifetimes of central air conditioners and heat pumps indicates that
there is a wide range of values for lifetimes. The references are
provided in Table 12, with the mean lifetimes given in years.
Table 12.--Central Air Conditioner and Heat Pump Mean Lifetimes
------------------------------------------------------------------------
In years--
Source ---------------------------
Central AC Heat pump
------------------------------------------------------------------------
Appliance Magazine. The Life Expectancy/ 13.0 14
Replacement Picture, Sept. 1998 a..........
National Association of Home Builders. 15.0 15
Housing Facts, Figures, and Trends, 1998 b.
1995 ASHRAE Applications Handbook c......... 15.0 15
M.E. Bucher et al, American Electric Power ............ d 19
Service Corp. 1990. ``Heat Pump Life and
Compressor Longevity in Diverse Climates'',
ASHRAE Transactions 96(1):1567-1571........
K.A. Pientka, Commonwealth Edison Co. 1987. ............ d 15-16
``Heat Pump Service Life and Compressor
Longevity in a Northern Climate'', ASHRAE
Transactions 93(1):1087-1101...............
C.C. Hiller, EPRI and N.C. Lovvorn, Alabama ............ d 20
Power Co. 1987. ``Heat Pump Compressor Life
in Alabama'', ASHRAE Transactions
93(1):1102-1110............................
J.E. Lewis, Easton Consultants. 1987. 12.1 10.9
``Survey of Residential Air-to-Air Heat
Pump Service Life and Maintenance Issues'',
ASHRAE Transactions 93(1):1111-1127........
MTSC, Inc. Energy Capital in the U.S. 12.0 12
Economy, prepared for the Office of Policy,
Planning, and Evaluation, U.S. Department
of Energy, Nov. 1980 e.....................
------------------------------------------------------------------------
a Based on first-owner use. Central AC min life = 8, max life = 18. Heat
Pump min life = 10, max life = 17.
b Sources: Air Conditioning and Refrigeration Institute; Air
Conditioning, Heating, and Refrigeration News; Air Movement and
Control Association; American Gas Association; American Society of Gas
Engineers; ASHRAE.
c Source for Central A/C: Akalin, M.T. 1978. ``Equipment life and
maintenance cost survey'', ASHRAE Transactions 84(2):94-106. Source
for Heat Pump: ASHRAE Technical Committee 1.8, 1986.
d Median lifetime.
e Based on retirement function.
The available sources report mean and median lifetimes ranging from
10.9 to 20 years. The Department's analysis assumed a mean lifetime of
18.4 years, based on a 1990 ASHRAE technical paper that has the most
recent and most detailed information on heat pump life available, based
on a survey of 2,184 heat pump installations in a seven-state region of
the United States. The sources that report shorter average lifetimes
are based on data of a lesser quality, and the Department considers
those figures are less reliable. For example, in the case of Appliance
Magazine, the reported lifetime values are based on expert opinion
rather than empirical data.
Appliances produced at some future date may have different
lifetimes than those in the same class produced in the past. The
projections of lifetimes and other parameters used in the analysis
should be based on observed empirical trends, as well as expert
knowledge of likely changes in the industry, since future changes are
not always straight-line projections of past trends. While expert
judgement is crucial, however, it must have a strong empirical basis.
With this in mind, the Department believes that the probability
distribution of equipment lifetime used in the analysis is the most
sound, given available evidence of past performance and recent trends.
Because none of the data on equipment lifetime indicates a relationship
between efficiency and lifetime, the Department assumes that equipment
lifetime is independent of efficiency.
EMPA claimed that lifetime should be based on first ownership
rather than actual equipment life. (Glenn Schleede, EMPA, Transcript,
pp 232; EMPA, #3) They stated that homeowners usually change residences
every 7 years. In response to this assertion, it was stated that
although the statute requires that LCC be determined it does not
specify the exact meaning of lifetime. (Mike Rivest, ADL, Transcript, p
236) Counter to EMPA's claims, OOE stated that energy efficiency
benefits are essentially swapped when a homeowner changes residence.
(Charlie Stephens, OOE, Transcript, pp 233; OOE, #7) That is, the new
homeowner will realize the benefits of the first owner's more efficient
equipment. They also add that an equipment lifetime of 15 years seems
reasonable for split system air conditioners, but that field data
indicates that heat pumps have a shorter life.
The Department believes that equipment life rather than first
ownership is the correct measure of lifetime. The Department continues
to seek any additional information that may provide better data on
actual air conditioner and heat pump life.
Discount Rate: Interested parties submitted several comments
recommending values or procedures for determining discount rates. An
industry representative suggested that rates of 18 to 20% may be
appropriate as consumers are paying off credit card debt at these
rates. (Jim Crawford, Trane, Transcript, p 237) He also asserted that
practical (i.e., implicit) discount rates (which are derived from
analyzing actual consumer behavior) may be on the order of 30%. EEI
also believes that credit card interest rates should be used as a basis
for establishing discount rates. (EEI, #2) EMPA believes DOE's discount
rates (as presented at the 1998 Framework Workshop) are too high and
based on faulty assumptions. They stated that discount rates should
reflect the true cost of money that consumers would have to spend to
purchase more efficient appliances. (EMPA, #3) Industry representatives
also stated that questions concerning consumer discount rates should be
included on any market surveys for determining retail prices and that
DOE needs to take into account any information supplied by the
industry's trade association, ARI. (Jim Crawford, Trane, Transcript, p
243; David Lewis, Lennox, Transcript, pp 243-244)
In contrast to these comments, OOE believes that prior discount
rates developed by DOE seem reasonable, although there are differences
in how consumers purchase air conditioner and heat pump equipment
compared to how they purchase other appliances. (OOE, #7) They strongly
disagreed that discount rates in excess of 15% might be appropriate.
They claim such high rates are based on calculating an
[[Page 66322]]
implicit discount rate or market failure factor based on past
shipments.
The Department's Process Rule for establishing new or revised
energy efficiency standards for consumer products describes how real
discount rates are to be established for residential consumers, as
follows:
For residential and commercial consumers, ranges of three
different real discount rates will be used. For residential
consumers, the mid-range discount rate will represent DOE's
approximation of the average financing cost (or opportunity costs of
reduced savings) experienced by typical consumers. Sensitivity
analyses will be performed using discount rates reflecting the costs
more likely to be experienced by residential consumers with little
or no savings and credit card financing and consumers with
substantial savings.
Based on the Department's guidelines provided in the Process Rule,
a distribution of discount rates was derived to reflect the variability
in financing methods consumers use in purchasing central air
conditioners and heat pumps. The real interest rate associated with
financing an appliance purchase is a good indicator of the additional
costs incurred by consumers who pay a higher first cost, but enjoy
future savings, although it is not the only indicator of such costs.
While the method used to derive this distribution relies on a number of
uncertain assumptions regarding the financing methods used by
consumers, DOE believes that the resulting distribution of discount
rates encompasses the full range of discount rates that are appropriate
to consider in evaluating the impacts of DOE standards on consumers
(i.e., values represented by the mid-range financing cost, consumers
with no savings, and consumers with substantial savings), as well as
all the discount rates which fall between the high and low extreme
values.
The method of purchase used by consumers is assumed to be
indicative of the source of the funds and the type of financing used,
although DOE is not aware of detailed research into this relationship.
Consumers purchase appliances as parts of new homes (mortgages) and as
separate retail purchases. Retail purchases are paid by cash, credit
cards, or loans. In the case of space-conditioning equipment, the loans
are assumed to take the form of second mortgages, as central air
conditioner and heat pump purchases often occur when home upgrades are
made. Based upon recommendations provided by the ARI, the shares of the
different financing mechanisms used for purchasing central air
conditioners and heat pumps were assumed to be 30% with a new home
(first mortgages), 25% through loans (second mortgages), 10% paid by
cash, and 35% by use of credit cards.
In order to derive a full distribution of discount rates, DOE
estimated a range of interest rates, based on historical data and
judgments of future trends, for different types of consumer savings or
financing.
For new housing, the Department based its real mortgage rates on
ARI's suggested mean value of 3.0% and assumed a range of 1.6 to 4.4%.
Applying an assumed marginal tax rate of 28% (i.e., the maximum
marginal rate paid by most U.S. taxpayers) and an assumed inflation
rate of 2% results in a mean nominal mortgage rate of 6.94% with a
range of 5.0 to 8.89%.
For second mortgages or loans, ARI suggested a mean real interest
rate of 8.0%. This rate is more representative of a nominal rate for
second mortgages and was used as such. Assuming a tax rate of 28%, then
subtracting an assumed inflation rate of 2% (the same rates used to
derive the new home real interest rates) we arrive at a mean real
interest rate of 3.76%. Nominal minimum and maximum interest rates of
6% and 10% were assumed to arrive at the real interest rate range of
2.32% to 5.20%.
For cash, the minimum rate was assumed to equal 0%. This rate
applies to purchasers making cash purchases without withdrawing from
savings accounts. Based upon ARI's recommendation, the maximum is taken
to be the opportunity cost represented by the interest that could have
been earned in a typical mutual fund (assumed to be 6% real). A real
mean rate of 3% results.
For credit cards, the Department based its real interest rate on
ARI's suggested mean value of 12.5%. Minimum and maximum real rates of
6% and 19% were assumed. It should be noted that the use of these
credit card rates reflects an assumption that all consumers who use
credit cards do so as a means of long term financing for product
purchases, rather than as simply a convenient method of purchase or as
a means of short term financing.
Combining the assumed shares of each financing method, the above
real interest rates result in a weighted-average (mean) value of 6.51%
and a distribution that varies from 0 to 19%. Sensitivity studies show
that while the LCC results are sensitive to the value chosen for mean
discount rate, the LCC results are not sensitive to the distribution of
discount rates.
The Department believes that the above method is a valid basis for
establishing a distribution of discount rates over the full range of
discount rates relevant to most purchasers of the products covered by
this rulemaking, but acknowledges that different assumptions might be
made about likely interest, inflation and marginal tax rates, or about
consumer financing methods, and that different approaches to
identifying valid consumer discount rates might also be valid. For
example, it is also possible to base consumer discount rates on the
average real rates of return on consumer investment or other measures
of the opportunity costs incurred by consumers that purchase the
covered products. DOE does not believe, however, that such alternative
assumptions or alternative approaches would significantly alter the
range of discount rates used by the Department or the conclusions drawn
from the life cycle cost analyses conducted using these discount rates.
The Department is seeking any information that would support
significant alterations in the range or distribution of the discount
rates derived from DOE's analysis. Alternatively, DOE is soliciting
comment on the possible use of a standardized distribution of discount
rates ranging from approximately 4% to 12%, with a mean of 6%. The use
of such a standardized distribution would explicitly recognize the many
uncertainties associated with DOE's current analysis and, based on
sensitivity analyses already performed by DOE, such a standardized
distribution would not significantly alter the conclusions of DOE's
life cycle cost analyses.
Repair Costs: The annual repair cost covers the replacement or
repair of components which have failed. The Department assumed repair
costs for minimum efficiency equipment (10 SEER) and equipment with
efficiencies greater than 12 SEER were equal one-half the equipment
price divided by the mean equipment lifetime. The Department assumed
equipment with efficiencies of 11 and 12 SEER incur a 1% increase in
repair cost over the minimum efficiency (10 SEER) level. The rationale
for assuming essentially flat repair costs through efficiencies up to
and including 12 SEER pertains to the level of technology being used at
these system efficiency levels. Through 12 SEER, system technology
generally does not incorporate sophisticated electronic components
which are believed to incur higher repair costs. Increases in SEER are
generally achieved through more efficient single-speed compressors or
more efficient and/or larger heat exchanger coils. Systems with
[[Page 66323]]
efficiencies beyond 12 SEER start to incorporate modulating blowers or
compressors which are generally believed to be more susceptible to
failure.
Maintenance Costs: The annual maintenance cost covers such items as
checking and maintaining refrigerant charge levels and cleaning heat
exchanger coils. Data from Service Experts, an HVAC service company,
were used to establish maintenance costs. The maintenance cost ranges
from $0 to $135 with a weighted-average value of $36.
EMPA stated that DOE needs to collect and include extended warranty
and service costs in LCC calculations. (Glenn Schleede, EMPA,
Transcript, p 231; EMPA, #3) EMPA also requested that the assumptions
regarding maintenance and repair costs be reevaluated and described in
greater detail. An industry representative supported including these
costs, and also stated that they will be a function of equipment
efficiency. (David Lewis, Lennox, Transcript, p 231) A suggestion was
made to include questions on warranty and service costs on any market
survey for determining retail prices (Steven Nadel, ACEEE, Transcript,
p 232). OOE endorsed the concept of accounting for differences in
maintenance, service, and installation costs, provided these
incremental costs are attributable only to equipment at different
efficiency levels (OOE, #7).
Although the Department included maintenance costs in its LCC
calculations, no attempt was made to account for warranty costs. The
Department assumed that warranty costs are constant with increased
efficiency and, thus, there was no need to explicitly account for
warranty costs. The Department welcomes any comments that can provide
insight as to how warranty costs should be accounted for in the LCC
Analysis.
ii. Equipment Prices
How manufacturing costs and profit margins associated with
standards are passed through from manufacturers to consumers has an
impact on both consumers and manufacturers. Consumer and manufacturer
economics are linked and inversely related. For this reason, equipment
purchase prices used for the LCC Analysis need to be reconciled with
manufacturer costs.
At the pre-ANOPR stage, a consumer LCC curve, based in part on mean
installed consumer costs, is a significant factor in the initial
selection of potential standards levels. Total installed costs are
needed for a base case, absent new standards, and for all efficiency
levels to be considered. As noted earlier, equipment purchase price
coupled with the installation price equals the total installed consumer
cost.
There was a great deal of discussion at the 1998 Framework Workshop
concerning equipment or retail prices, because equipment prices were
being viewed as a means to verify industry-supplied manufacturer cost
data. Much of the discussion focused on the correlation between
manufacturer costs and prices. Some claimed that there is practically a
random relationship between manufacturer costs and prices and that
prices are based more upon market dynamics rather than improvements in
equipment efficiency. (Jim Crawford, Trane, Transcript, pp 90, 139-140)
It was also stated that, due to the tremendous variability in city
size, dealer groups, dealer size, dealer proximity to warehouses, bulk
purchasing, and national account purchasing, the markups involved in
converting manufacturer costs to retail prices are highly variable.
Also, because some manufacturers use distributors while others do not,
markups can vary significantly from manufacturer-to-manufacturer.
(David Lewis, Lennox, Transcript, pp 168-170) It was also noted that
markups are unlikely to be constant across all efficiencies. (Jim
Crawford, Trane, Transcript, pp 154)
In order better to determine equipment prices, participants at the
Workshop agreed that it would be appropriate to conduct a market
survey. There was discussion as to whether the survey should be
administered to contractors or consumers. It was pointed out that
contractors may not provide true prices as they may not want to reveal
their profit margins while consumers may simply not know the price of
only the equipment (i.e., the price exclusive of the labor, materials
and profit for installation). (Transcript, pp 170-186) With regard to
price data that may be collected from utilities, some of it might be
distorted due to demand side management (DSM) incentive programs, more
specifically rebate programs. The price collected may not be the actual
price of the equipment, but rather, the price after a rebate has been
applied. (Steve Rosenstock, EEI, Transcript, pp 190)
In written comments, EEI stated that there is little correlation
between manufacturer costs and retail prices, and that market surveys
of customers, utilities, and contractors will likely provide the best
information on retail prices. (EEI, #2) EMPA claimed that price data
collected will likely not reflect conditions in the current market.
(EMPA, #3) EMPA also stated that DOE should not shift the
responsibility of collecting and providing data to interested parties.
ACEEE noted two possible data sources: a 1996 Xenergy report and
Chris Neme at the Vermont Energy Investment Fund in Burlington, VT.
(ACEEE, #5) OOE suggested that two methods are needed for deriving
prices, each as a cross-check on the results of the other. (OOE, #7)
One approach should be a ``mark-up'' of manufacturer costs which yield
a range of retail prices. A market survey of equipment prices should be
used as the second approach, as opposed to a survey of market experts
trying to predict consumers' willingness to pay at various price
levels. With regard to current market prices, PG&E believes that split
system air conditioning equipment that exceeds 10 SEER are available at
competitive prices with 12 SEER systems being readily available. (PG&E,
#8)
For the pre-ANOPR Analysis, the Department did not attempt to
conduct a comprehensive contractor or consumer survey of equipment
prices. The primary reasons were the complexity of and the time needed
for a comprehensive survey, and the short time frame allotted by the
Department for publishing the Supplemental ANOPR. The Department will
consider conducting a survey for any updates to the analyses conducted
for the NOPR.
On November 30, 1998, however, the Department issued a Federal
Register Notice (63 FR 65767) requesting comments on a proposal to
survey retail prices for Central Air Conditioners and Heat Pumps. ARI
responded to that request by submitting comments. The comments asserted
that the proposed survey is woefully inadequate, given the number of
variables involved. (ARI, #9) ARI suggested that, at a minimum, data on
the following factors should be considered: (1) Three capacity sizes
(1.5, 3, and 5 tons), (2) five efficiency levels (10, 11, 12, 13, 14
SEER), and (3) four classes (split and single package air-conditioner/c
and heat pump). The survey should be weighted to reflect regional sales
markets and a large number of manufacturers should be represented in
the survey. In addition, there should be no reason to include questions
on the impact of utility rebates, as they are dwindling rapidly.
The Department uses various assumptions about cost pass-through
that are reflected in the price forecast approach. The output of this
analysis is a table describing retail prices for each possible
efficiency level, assuming that each level represents a new minimum
efficiency standard. Consistent with the
[[Page 66324]]
process rule, and building on the estimates generated by the various
assumptions, projected retail prices are described within a range of
uncertainty.
Purchase prices of baseline equipment were determined by estimating
manufacturing costs and applying appropriate markups along the
distribution chain. Markups were determined in two ways: through
surveys of distributor (wholesale) and retail prices, and through
publicly available financial reports. For about 90% of residential air
conditioning equipment, the distribution chain includes manufacturers,
distributors (wholesalers), and dealers (contractors). Equipment
purchase prices are thus estimated as the product of manufacturing
cost, manufacturer markup, distributor markup, dealer markup, and sales
tax.
For the determination of markups via financial reports, it was
assumed that product markups equal gross margin less pre-tax profit
margin (earnings-before-taxes) and outbound freight of 6%, plus 1%. The
baseline central air conditioner and heat pump units covered by this
analysis typically have lower margins than other products handled by
diversified companies. The values for markups given in the next
paragraphs may change in future stages of analysis as the underlying
data are improved and cross-checked.
Manufacturer Markup: Financial reports from five publicly traded
air conditioner manufacturers, representing 75% of the market, were
examined for a five-year period (1993-1997). Five-year average markups
for the two most dependent on air conditioner sales were 1.18 and 1.17
respectively. The other three companies are more diversified and, as
expected, exhibited higher markups--1.25, 1.24, and 1.18 respectively.
A central value of 1.18 was chosen for the Price Analysis, with a range
of 1.15 to 1.26, based on the lowest and highest markups for the five
manufacturers for the five-year period.
Distributor Markup: Five-year average markups for the 500 members
of the Air-conditioning and Refrigeration Wholesalers (ARW) were 1.37,
the same as for 1997. This value was used for the analysis. However,
since margins for after-market parts are substantially higher than
margins for baseline equipment, the actual markup on baseline equipment
is likely to be lower than the assumed value of 1.37. The markup value
may be revised downwards based on future information.
Dealer Markup: Markups were calculated for contractors represented
by the Air Conditioning Contractors of America (ACCA) and two
contractor consolidators that focus on the residential market.
Information used from ACCA covered ``residential and light commercial''
dealers, and was divided into new and retrofit services, with markups
of 1.41 and 1.63, respectively. The weighted average markup for ACCA
was 1.55 (based on 66 percent of all sales being retrofit sales), close
to the markup of 1.54 for one of the contractor consolidators. The
markup for the other consolidator was 1.38, but half of its revenues
come from plumbing, electrical, and other services that typically have
lower margins. A central value of 1.55 was chosen for the Price
Analysis, with a range of 1.37 (based on information from ICF
Consulting on equipment markups for direct replacement) to 1.63.
Sales Tax: In many cases, local and state sales taxes are applied
to equipment purchases. Using 1997 state and local sales tax data and
1994 state unitary shipment data, the Department calculated a
distribution of combined sales tax rates. Although the distribution
revealed a small percentage of consumers at tax rates of 0% and 10%,
the effective distribution was triangular with a mean of 6.7% and a
range from 5% to 8%. This corresponds to a mean markup of 1.07 with a
range from 1.05 to 1.08.
Overall Markup: Equipment purchase price is determined by
multiplying manufacturer cost and overall markup. Mean values and
ranges for the overall markup are the products of the mean values and
ranges for manufacturer markup, distributor markup, dealer markup and
sales tax. The mean overall markup is thus calculated as 2.68, with a
range of 2.27 to 3.04.
iii. Payback Analysis (Distribution of Paybacks)
Payback is calculated based on the same inputs used for the LCC
Analysis with the difference that the payback values are based on first
year savings achieved after the standard takes effect. The output of
the analysis is a distribution of payback periods. The mean payback
period is also reported. Additional information is available in the LCC
spreadsheet which is posted to the Department's web site. The data
includes charts of cash flow taking into account the changing annual
fuel prices.
iv. Rebuttable Payback
As discussed previously, EPCA established a rebuttable presumption
that a standard is economically justified if the additional product
purchase cost attributed to the standard is less than three times the
value of the first year energy cost savings, which is equivalent to a
three year simple payback. The calculation of rebuttable payback is
based on single point-values instead of probability distributions used
in the LCC analysis. For example, where a probability distribution of
electricity prices are used in the distributional Payback Analysis,
only the weighted-average value from the probability distribution of
electricity prices is used for the determination of the Rebuttable
payback.
Other than the use of single point-values, the most notable
difference between the two payback analyses is the Rebuttable payback's
reliance on the DOE test procedure to determine a central air
conditioner's or heat pump's annual energy consumption. The DOE test
procedure for central air conditioners and heat pumps in the cooling
season uses the following expression to calculate the annual space-
cooling energy consumption:
Space-Cooling Annual Energy Use = (Cooling Capacity SEER) x
Hours
where the Hours equal 1000, the assumed annual operational hours of the
space-cooling equipment.
The DOE test procedure for the heating season performance of heat
pumps uses the following expression to calculate the annual space-
heating energy consumption:
Space-Heating Annual Energy Use = (DHR HSPF) x 0.77 x
Hours
where DHR equals the design heating requirement (which for 3-ton
cooling capacity heat pumps is typically 35,000 Btu/hr) and Hours equal
2080, the assumed seasonal operational hours of the space-heating
equipment.
The annual space-cooling and heating energy consumption calculated
based on the previous equations from the DOE test procedure are on the
order of 50% greater than the weighted-average values from the 1993
RECS. This means that the payback value calculated from the DOE test
procedure equations will be significantly lower than the average
payback value calculated from the RECS analysis, for any standard
level.
Rebuttable payback periods are first calculated between the new
standard level being analyzed and each central air conditioner or heat
pump efficiency being sold in the year 2006. The paybacks are then
weighted and averaged according to the percentage of each equipment
efficiency sold before a new standard is enacted. Rather than being
based on probability distributions, single point values are used for
the input variables. These values (e.g., operating hours per year) will
correspond to those defined in the DOE
[[Page 66325]]
test procedure. The result is a single-value of payback and not a
probability distribution. The payback is calculated for the expected
effective year of the standard (e.g., 2006). Examples and further
details are presented in the Preliminary TSD.
Based on the most recently available shipments data from ARI (from
1994), Table 13 shows the markets shares by efficiency level for each
of the four product classes being analyzed.
Table 13.--Efficiency Level Market Shares
[In percent]
----------------------------------------------------------------------------------------------------------------
Single Single
SEER Split A/C Split HP package A/C package HP
----------------------------------------------------------------------------------------------------------------
10.............................................. 78.7 59.3 82.3 64.2
11.............................................. 5.4 15.0 9.7 13.6
12.............................................. 12.0 19.7 6.8 22.2
13.............................................. 3.6 4.5 1.2 0.0
14.............................................. 0.1 1.0 0.0 0.0
15.............................................. 0.2 0.5 0.0 0.0
----------------------------------------------------------------------------------------------------------------
Because the shipment-weighted efficiencies of unitary air conditioners
and heat pumps has remained essentially flat over the four year period
from 1994 to 1997, the previous market shares in Table 13 for 1994 are
assumed to be applicable for the year 2006. If available, data on a
forecasted distribution of equipment efficiencies in the year 2006 will
be used to refine these calculations for the NOPR Analysis.
2. Preliminary Results
a. General
Calculation of LCC captures the tradeoff between the increases in
purchase price and reductions in operating expenses for increasing
efficiencies of appliances. In addition, two other measures of economic
impact are calculated: distributions of payback periods and a payback
period calculated for purposes of the rebuttable presumption clause.
The outputs of the LCC spreadsheet include probability distributions
and single-point average values of the impacts for each energy
efficiency level compared to the baseline. A distinct advantage of
modeling based on probability distributions is that the percentage of
consumers achieving LCC savings or attaining certain payback periods
due to an increased efficiency standard can be identified. A variety of
graphic displays can illustrate the implications of the analysis
results. These include: (1) A cumulative probability distribution
showing the percentage of U.S. households that would have a net saving
by owning a more energy-efficient appliance, and (2) a chart depicting
the variation in LCC for each efficiency level considered.
b. Product Specific
The following LCC results show the mean LCCs associated with the
standard levels which were analyzed. In addition, the percent of
households with reduced LCCs relative to current minimum efficiency
equipment (10 SEER) are provided. LCC results are provided based upon
the manufacturer cost estimates from the efficiency-level approach
(section II C.1.b.i.) and the reverse engineering (section
II.C.1.b.ii.). LCC results are presented for nominal 3-ton capacities
for the four primary product classes, i.e., split-type air
conditioners, split-type heat pumps, single-package air conditioners,
and single-package heat pumps (See Tables 14 to 17). Since the values
of most inputs are uncertain and are represented by probability
distributions of values rather than discrete values, the results
presented in the Preliminary TSD (which describes the analytic results
in greater detail) are also described by probability distributions.
Table 14.--Split-Type Air Conditioners--LCC Results
----------------------------------------------------------------------------------------------------------------
Source of manufacturing cost data
---------------------------------------------------------------
Industry Reverse engineering
SEER ---------------------------------------------------------------
Percent with Percent with
Mean LCC lower LCC Mean LCC lower LCC
----------------------------------------------------------------------------------------------------------------
10.............................................. $4,837 .............. $4,828 ..............
11.............................................. 4,827 39 4,786 48
12.............................................. 4,886 31 4,770 45
13.............................................. 5,229 12 4,931 27
14.............................................. 5,659 6 5,246 15
15.............................................. 6,052 4 5,456 11
16.............................................. .............. 2 5,533 11
17.............................................. .............. .............. 5,672 10
----------------------------------------------------------------------------------------------------------------
[[Page 66326]]
Table 15.--Split-Type Heat Pumps--LCC Results
----------------------------------------------------------------------------------------------------------------
Source of manufacturing cost data
---------------------------------------------------------------
Industry Reverse engineering
SEER / HSPF ---------------------------------------------------------------
Percent with Percent with
Mean LCC lower LCC Mean LCC lower LLC
----------------------------------------------------------------------------------------------------------------
10 / 6.8........................................ $10,086 .............. $10,001 ..............
11 / 7.1........................................ 9,915 74 9,695 99
12 / 7.4........................................ 9,852 63 9,533 90
13 / 7.7........................................ 10,119 36 9,850 49
14 / 8.0........................................ 10,311 28 10,246 27
15 / 8.2........................................ 11,079 11 10,534 20
16 / 8.2........................................ .............. .............. 10,679 18
----------------------------------------------------------------------------------------------------------------
Table 16.--Single Package Air Conditioners--LCC Results
----------------------------------------------------------------------------------------------------------------
Source of manufacturing cost data
---------------------------------------------------------------
Industry Reverse engineering
SEER ---------------------------------------------------------------
Percent with Percent with
Mean LCC lower LCC Mean LCC lower LCC
----------------------------------------------------------------------------------------------------------------
10.............................................. $5,341 .............. $5,324 ..............
11.............................................. 5,429 20 ..............
12.............................................. 5,433 26 5,194 58
13.............................................. 6,031 5 5,598 17
14.............................................. 6,362 4 .............. ..............
15.............................................. 6,921 2 .............. ..............
----------------------------------------------------------------------------------------------------------------
Table 17.--Single Package Heat Pumps--LCC Results
----------------------------------------------------------------------------------------------------------------
Source of manufacturing cost data
---------------------------------------------------------------
Industry Reverse engineering
SEER ---------------------------------------------------------------
Percent with Percent with
Mean LCC lower LCC Mean LCC lower LCC
----------------------------------------------------------------------------------------------------------------
10 / 6.8........................................ $10,025 .............. $9,912 ..............
11 / 7.1........................................ 9,906 61 .............. ..............
12 / 7.4........................................ 9,835 58 9,551 80
13 / 7.7........................................ 10,342 22 .............. ..............
14 / 8.0........................................ 10,425 21 .............. ..............
15 / 8.2........................................ 11,031 10 .............. ..............
----------------------------------------------------------------------------------------------------------------
Tables 18 to 21 show the median payback periods associated with
each standard level. To note, the median value of a distribution has an
equal number of payback periods that are greater than and less than the
reported value. As with the LCC results, payback periods are provided
based upon both the manufacturer cost estimates from the industry and
from the reverse engineering analysis. Payback period results are
presented for the four primary product classes; split-type air
conditioners, split-type heat pumps, single-package air conditioners,
and single-package heat pumps.
Table 18.--Split-type Air Conditioners--Median Payback Periods
[In years]
------------------------------------------------------------------------
Source of manufacturing
cost data
SEER -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11............................................ 13 10
12............................................ 15 11
13............................................ 41 20
14............................................ 80 35
15............................................ 137 43
16............................................ ........... 46
17............................................ ........... 49
------------------------------------------------------------------------
Table 19.--Split-type Heat Pumps--Median Payback Periods
[In years]
------------------------------------------------------------------------
Source of manufacturing
cost data
-------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11/7.1........................................ 6 1
12/7.4........................................ 8 3
13/7.7........................................ 13 10
14/8.0........................................ 17 17
15/8.2........................................ 31 21
16/8.4........................................ ........... 22
------------------------------------------------------------------------
[[Page 66327]]
Table 20.--Single Package Air Conditioners--Median Payback Periods
[In years]
------------------------------------------------------------------------
Source of manufacturing
cost data
SEER -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11............................................ 20 ...........
12............................................ 17 8
13............................................ 84 30
14............................................ 133 ...........
15............................................ 559 ...........
------------------------------------------------------------------------
Table 21.--Single Package Heat Pumps--Median Payback Periods
[In years]
------------------------------------------------------------------------
Source of manufacturing
cost data
SEER/HSPF -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11/7.1........................................ 8 ...........
12/7.4........................................ 9 5
13/7.7........................................ 20 ...........
14/8.0........................................ 20 ...........
15/8.2........................................ 31 ...........
------------------------------------------------------------------------
Tables 22 to 25 show the simple paybacks for purposes of the
rebuttable presumption clause. This means test procedure assumptions
are followed for central air conditioners and heat pumps.
Table 22.--Split-Type Air Conditioners--Simple Payback
[In years]
------------------------------------------------------------------------
Source of manufacturing
cost data
SEER -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11............................................ 6.2 5.0
12............................................ 7.6 5.4
13............................................ 13.7 7.8
14............................................ 20.9 12.7
15............................................ 26.8 14.7
16............................................ ........... 14.6
17............................................ ........... 15.4
------------------------------------------------------------------------
Table 23.--Split-Type Heat Pumps--Simple Payback
[In years]
------------------------------------------------------------------------
Source of manufacturing
cost data
SEER/HSPF -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11/7.1........................................ 3.2 0.4
12/7.4........................................ 4.2 1.8
13/7.7........................................ 6.8 5.6
14/8.0........................................ 8.0 8.8
15/8.2........................................ 13.8 10.5
16/8.4........................................ ........... 10.8
------------------------------------------------------------------------
Table 24.--Single Package Air Conditioners--Simple Payback
[In years]
------------------------------------------------------------------------
Source of manufacturing
cost data
SEER -------------------------
Reverse
Industry engineering
------------------------------------------------------------------------
11............................................ 9.9 ...........
12............................................ 8.5 3.8
13............................................ 21.2 11.2
14............................................ 25.2 ...........
15...............................
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