11 -i 

### CHAPTER 11. CONSUMER SUB G ROUP ANALYS IS

TABLE OF CONTENTS

11.1 INTRODUCTION ......................................................................................................... 11-1

11.2 SINGLE PACKAGE VERTI CAL UNIT CUSTOMER SU BGROUPS ....................... 11-1

11.3 INPUTS TO THE SUBGROUP ANALYSIS FOR SMAL L BUSINESSES ............... 11-2

11.4 RESULTS FOR CUSTOMER SUBGROUPS .............................................................. 11-4

REF ERE NCES .......................................................................................................................... 11-9

LIST OF TABLES

Table 11.3.1 Discount Rate Difference Between High Cost of Capital Companies and

Market Average Companies .............................................................................. 11-4

Table 11.4.1 Comparison of Average Annual Electricity Consumption and Annual

Energy Bill for Customer Subgroups with All Customers, SP VAC

<65,000 Btu/h .................................................................................................... 11-5

Table 11.4.2 Comparison of LCC and PBP Impacts for Customer Subgroups with All

Customers, SPVAC <65,000 Btu/h ................................................................... 11-6

Table 11.4.3 Comparison of Annual Electricity Consumption and Annual Energy Bill for

Customer Subgroups with All Customers, SPVHP <65,000 Btu/h ................... 11-6

Table 11.4.4 Comparison of LCC and PBP Impacts for Customer Subgroups with All

Customers, SPVHP <65,000 Btu/h .................................................................... 11-6

Table 11.4.5 SPVAC <65,000 Btu/h: LCC and PBP Results for Education Customers ........... 11-7

Table 11.4.6 SPVAC <65,000 Btu/h: LCC and PB P Results for Temporary Office

(Construction and Mining) Customers............................................................... 11-7

Table 11.4.7 SPVAC <65,000 Btu/h: LCC and PBP Results for High Discount Rate

Companies

................................ ................................ .......................................... 11-7

Table 11.4.8 SPVHP <65,000 Btu/h: LCC and PBP Results for Education Customers ........... 11-8

Table 11.4.9 SPVHP <65,000 Btu/h: LCC and PB P Results for Temporary Office

(Construction and Mining) Customers............................................................... 11-8

Table 11.4.10 SPVHP <65,000 Btu/h: LCC and PBP Results for High Discount Rate

Co m panies

................................ ................................ .......................................... 11-811 -1 

### CHAPTER 11. CONSUMER SUBGROUP ANALYSIS

11.1 INTRODUCTION

Chapter 8 describes the life- cycle cost (LCC) and payback period (PBP) analysis that

exa m ines impacts of energy conservation stan d ar ds on purchas ers of the affected p rod u cts. In

an alyzing the potential impact of new or a mended standards on residential, industrial, and

commercial custo m ers, the U.S. Department of Energy ( DOE ) further evaluates t h e i mpact on

identifiable groups of custom ers ( i.e. , subgroups) that ma y be disproportionately affected by a

national standard level. The subgroup analysis evaluates im pacts by ana lyzing the LCCs and

PBPs for subgroups of custom ers. For it s a nalysis of single package vertical air conditioners and

heat pumps (SPVAC and SPVHP, respe ctively ), DOE identified three customer subgroups:

public education customers, temporary office custo m ers , and small businesses.

Because DOE did not conduct its LCC and PBP a nalysis with a sa m ple of single package

vertical unit ( SPVU ) equipment users, it did not develop specific subgroup samples for the

subgroup analysis. Instead, DOE varied certain inp u ts to the LCC and PBP calcul ations to

approxim ate the i mpacts of potential standards on the considered subgroups. This chapter

describes the subgroup an alys is in further detail and gives the results of the LCC and PBP

analyses for the considered subgroups.

11.2 SINGLE PACKAGE VERTICAL UNIT CUSTOMER SUBGROUPS

DOE conducted L CC and PBP analyses for three identifiable subgroups of SPVU

equipment customers who could be disproportionately affected by the proposed standards:

1. P ublic education custo m ers , who as government entities have low financing costs

and discount rates, and therefore would find any initial cost premium for more

efficient SPVU equipment less burdenso me than the average customer. However,

government entities also often see lower electricity prices

. In the case of air

conditioning units, the se customers use less energy than the average commercial

customer , and there fore may benefit less from energy savings. In the case of heat

pumps, the se customers use more energy than the average customer, and even though

they experience lower prices, their average energy cost savings are typically greater.

2. T emporary office custo m ers in the mining and commercial construction industries

may have relatively high costs of capital and discount rates because of the high

average market risks in these industries , and would find future energy cost savings

fr om SPVU equipment less attractive than the average cu stomer. However, their

(tempo r ary office ) buildings on average also experience relatively high electric i ty

prices , so other things being equal, the ir energy savings benefits would also be

relatively high. In the case of air conditioning, the se customers us e less energy than

the average customer such that their energy bill savings are typically smaller even

though they experience higher prices. In the case of heat pumps, energy savings for

these customers are about average, so their energy bill savings tend to be slightly

above average

.11 -2 

### 3. B usinesses that experience higher capital costs than the indus try av e rage would

find future energy savings for efficient SPVU equipment less attractive than the

average customer (often these are small businesses ). For the first two customer

subgroups, the capital cost and electricity price conditions tend to offset each other,

so it is not clear without doing a quantitative analysis whether this subgroup would

experience higher

- than

- average or lower

- than

- average LCC savings. For the third

customer subgroup, DOE assumed that higher capital costs were the main

distinguishing feature of small business customers, with commercial electricity prices

being the same for small firms as for average commercial customers

. High c apital

costs mean that the firm needs a rapid return on investment and will more steeply

discount future energy savings from an investment in energy efficiency. Other things

being equal, high capital costs would tend to make more efficient and costly SPVU

equipment less economically attractive to business es than to the average commercial

customer.

DOE determined the impact of customer subgroup costs and savings using the LCC

spreadsheet model. DOE conducted the LCC and PBP analysi s separately for customers

represented by the mining and construction firms using temporary office buildings and by public

education customer s using portable classrooms, and then compared the results with those for

average commercial customers. DOE also co nducted an analysis in which only firms with a

discount rate 3.1 percent higher than the corresponding industry average were selected. This

premium corresponds to the long- term risk premium for the smallest publicly traded companies

in the U.S. economy (se e section 11.3 ). While not all of these may be small businesses, they

were the ones that had the highest costs of capital and were the least likely to benefit from

increased standards for SPVU equipment.

Due to the higher costs of conducting business, benefits of SPVU equipment standards

for small businesses are estimated to be slightly lower than for the general population of SPVU

equipment owners.

11.3 INPUTS TO THE SUBGROUP ANALYSIS FO R SMALL BUSINESSES

The S m all Business Ad mi nistration (SBA) defines a s m all business by its annual receipts

or its num ber of employees. DOE did not have data on the percentage or identity of small

businesses that might purchase SPVU equi pment. DOE assumed that SPVU equipment is used

throughout the five types of business identified in chapter 8 (health care, telecommunications,

construction and mining, education, and general office and retail ). Using the Damodaran Online

database 1 

### described in chapter 8, DOE was not able to identify health care firms that qualified as

small businesses or that had significantly higher than average costs of capital. With regard to the

public education subgroup, DOE only had data on average costs of c apital for public entities

issuing municipal bonds, not data that distinguished between large and small school systems. For

the analysis of businesses with high capital costs, DOE used financial market statistics on the

remaining three types of business: c onstruction and mining, general office and retail, and

telecommunications.

To estimate discount rates for sm all co mpan ies that purchase SPVU equipment , DOE

used the same methodology as for the general population of SPVU equipment custo m ers as11 -3 

### presented in chapter 8

. a 

### However, f or s m all companies, p articul a rly v ery s m all c ompanies,

historic al returns have been significantly higher than the Capital Asset Pricing Model ( CAPM )

equation predicts. This additional return can be accounted for by adding a size premiu m to the

cost of equity for sm all fir m s:

k

e 

### = R f 

### + 

# ( β × ER P 

# ) + S

Eq. 11.1

Where:

k

e 

### = c ost of equity,

R

f 

### = expected return on risk- free as s ets,

β = r isk coefficient of the fir m,

ERP = equity risk prem iu m, and

S = s ize p re m ium.

DOE obtained size premium data from the Ibbotson SBBI 2013 Classic Yearbook:

Market Results for Stocks, Bonds, Bills, and Inflation 1926-2012

. 2 b 

### For the period of 1925–

2012, the geometric mean of annual returns for the smallest companies in all industries (13.1

percent) was 3.1 percent above the average for the total value -weighted index of companies

listed on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and

National Association of Security Dealers Stock Exchange (NASDAQ) (9. 6 percent) . This

impl ies that , on average, historical performance of small companies has been (113.0/109.6) =

1.031, or 3.1 percent higher than the market average, in effect a “smal l company size premium.”

DOE assumed that for businesses purchasing SPVU equipment and purchasing or renting

modular buildings containing SPVU equipment , the average discount rate for small companies is

1.031 times the industry average.

DOE calculated t he real weighted a v erage c o st of capital (WACC) for businesses in the

Damodaran data set whose WACC was 1.03 1 times the industry average or higher and repeated

the chapter 8 analysis for these higher capital cost businesses. T he difference in the average

discount rate between the high discount rate firms and the indus try average (which also includes

these firms) is between 1. 59 and 1.89 percent based on data from Damodaran c 

### (see Table 11.3.1 ).

a DOE as sum ed for each business type that businesses with high costs of capital are a r eas on ab l e p ro xy for smal l

bus in esses that use SPVU equipment.

b In this calcula t ion, s m all c o mpanies were companies in the smallest 10 percent (decile) size class based on market

capitalization. A verage m ar k et ca p italizati on for the smallest firms was $8 6.7 m illi on , th e average Ib bo tso n

de fi n iti o n of 1,361 d ecile 10 compan ies. In 201 3 $, this would be about $ 90.8 million.

c The da t abase from chapter 8 f o r th e three industries us ed fo r th is a n alysis i nclud es 337 compan ies, 148 of wh ich

meet the 1.03 1 criterion for high capital cost.11 -4 

### Table 11.3.1 Discount Rate Difference Between High Cost of Capital Companies and

Market Average Companies

Real Discount R a te

%

Sector Industry Average Average of High

Capital Cost Firms Difference

Temporary Office 7.06 8.65 1.59

Telecommunications 6.80 8.62 1.82

General Office and Retail 5.62 7.51 1.89



### 11.4 RESULTS FOR CUSTOMER SUBGROUPS

Table 11.4.2 and Table 11.4.4

, summarize the LCC and PBP results for education,

temporary office , and sm all b u siness customers in comparison with all customers for two SPVU

equipment classes. Corresponding annual energy consumption and energy bill comparisons are

shown in Table 11.4.1 and Table 11.4.3

. Table 11.4.5 through Table 11.4.7 summarize the

details for each subgroup for single package vertical air conditioning (SPVAC) <65,000 Btu/h

equipment. Table 11.4.8 through Table 11.4.10 summarize the results for the sa me subgroup

types for SPVHP <65,000 Btu/h equipment. Th e tables pro v ide the average or m ean LCC, the

LCC savings or costs relative to the base case, and the perce n tage of custo m ers who are

burdened with net costs or who realize n et savings. The m edian PBPs are also pr ovided. The

LCC results presented here are national averages based on the estimated curre nt distribution of

sh ip m ents.

In general, the benefits of moving to a highe r efficiency level are less in the ca s e of the

customer subgroups than in the overall population of SPVU equipment customers, consistent

with their generally lower energy savings. The exceptions are that education customers show

greater than average LCC benefits in the SPVHP equipment class. Also , whether it is greater or

less, the maximum LCC benefit generally occurs at the same efficiency level in every subgroup

as in the overall population for SPVHP

. For SPVAC , the maximum LCC benefit is at TSL 2 for

the subgroups and for the overall population. The exception is that mining and construction

customers show an LCC loss at every efficiency level above the baseline

.

The analysis indi cates that for SPVAC units ( Table 11.4.2 ), all three subgroups fare

slightly worse than the average customer . In general , the three subgroups experience lower LCC

savings and longer PBPs than the average customer . In the cases of education and temporary

office customers, t his occurs mainly because —although they pay the same installed cost

premium for more efficient SPVAC units

— they use and save less energy than do average

customers and therefore benefit less from the energy savings. This effect swamps the effects of

energy prices. In the case of mining and construction customers, LCC savings also are further

reduced by the effec ts of their higher discount rate, which further reduces the value of their

already

- smaller energy savings. Because the high discount rate customers have the same energy

savings as average customers, the only impact they experience is from their higher discount rate,

which reduces LCC savings. (Except for rounding and sampling error, the high discount rate

customers have the same PBP as the average customers because their first -year operations

savings and installed costs are the same . They differ mainly in the discount rate, which has no

impact on first

- year cost except for a very small effect on the annualized value of repair costs.)11 -5 

### The picture is somewhat more mixed for SPVHP units, with the high -rate subgroup and

construction and mining firms generally f aring worse and the education subgroup generally

faring somewhat better than the average customer (see Table 11.4.4 ). Education SPVHP

customers save more energy than the average customer. Thus, even though education customers

pay a lower price on average, their energy cost savings are higher than average

, and they have a

lower discount rate on those savings, making the savings worth more. In combination, these two

factors make the LCC savings for education SPVHP customers higher than those of the average

SPVHP customer. The construction and mining SPVHP cus tomers save slightly less energy than

the average customer, and their higher discount rate makes these savings wor th less to them.

Finally, since high discount rate customers save the same amount of energy as the average

customer, they only experience the effects of their higher discount rate, which moderately

reduces their LCC savings and has no effect on PBP.

Table 11.4.1 Comparison of Average Annual Electricity Consumption and Annual Energy

Bill for Custome r Subgroups with All Customers, SPVAC <65,000 Btu/h

TSL Efficiency

Level Annual Electricity Consumption in 2019

kWh Annual Electricity Bill in 2019

2013$

Construction

and Mining Education High

Rate All Construction

and Mining Education High Rate All

Baseline 4,255 5,826 6,175 6,175 467.29 581.37 658.80 658.80

1 1 4,123 5,607 5,923 5,923 452.86 559.67 631.86 631.86

2 2 4,002 5,409 5,694 5,694 439.74 539.94 607.37 607.37

3 3 3,841 5,142 5,387 5,387 422.16 513.49 574.53 574.53

4 4 3,735 4,968 5,185 5,185 410.63 496.15 553.00 553.0011 -6 

### Table 11.4.2 Comparison of LCC and PBP Impacts for Customer Subgroups with All

Customers, SPVAC <65,000 Btu/h

TSL Effici

ency

Level LCC Savings

2013$ * Median Payback Period

years

Construction

and Mining Education High

Rate All Construction

and Mining Education High

Rate All

1 1 (27) 98 101 116 13.8 9.6 7.9 7.9

2 2 (60) 148 153 179 14.7 10.1 8.3 8.4

3 3 (429) (92) (66) (24) 26.7 17.5 14.3 14.4

4 4 (1,323) (944) (867) (825) 55.0 33.5 28.1 27.3

* Values in parentheses are negative values.



### Table 11.4.3 Comparison of Annual Electricity Consumption and Annual Energy Bill for

Customer Subgro u ps with All Customers, SPVHP <65,000 Btu/h

TSL Efficiency

Level Annual Electricity Consumption in 2019

kWh Annual Electricity Bill in 2019

2013$

Construction

and Mining Education High

Rate All Construction

and Mining Education High Rate All

Baseline 19,162 21,459 20,383 20,383 2128.81 2,161.92 2,123.89 2,123.89

1 1 18,744 20,958 19,921 19,921 2082.68 2,111.63 2,076.00 2,076.00

2 2 18,493 20,630 19,629 19,629 2055.15 2,078.91 2,045.97 2,045.97

3 3 17,691 19,731 18,775 18,775 1966.63 1,988.48 1,957.34 1,957.34

4 4 17,586 19,556 18,633 18,633 1955.10 1,971.14 1,942.81 1,942.81



### Table 11.4.4 Comparison of LCC and PBP Impacts for Customer Subgroups with All

Custome rs, SPVHP < 65,000 Btu/h

TSL Efficiency

Level LCC Savings

2013$ * Median Payback Period

years

Construction

and Mining Education High

Rate All Construction

and Mining Education High

Rate All

1 1 259 440 342 358 4.2 3.8 4.1 4.1

2 2 274 549 403 424 5.4 4.6 4.8 4.8

3 3 527 1,056 769 819 6.3 6.1 6.2 6.2

4 4 (488) 83 (222) (177) 14.5 12.7 13.6 13.6

* Values in parentheses are negative values.11 -7 

### Table 11.4.5 through Table 11.4.7 show the detailed LCC and PBP impacts of SPVAC

<65,000 Btu/h equipment on the individual customer subgroups.

Table 11.4.5 SPVAC < 65,000 Btu/h: LCC and P BP Results for Education Customers

TSL Efficiency

Level

Number Life

- Cycle Cost, All Customers Life

- Cycle Cost Savings

Payback

Period,

Median

years Installed

Cost

2013$ Total

Discounted

Operating

Cost

2013$ LCC,

All

Customers

2013$ Affected

Customers'

Average

Savings

2013$ * % of Customers that

Experience

Net

Cost

% No

Impact

% Net

Benefit

%

Baseline 4,847 13,622 18,469

1 1 4,991 13,379 18,370 98 22 26 53 9.6

2 2 5,136 13,161 18,297 148 33 1 65 10.1

3 3 5,601 12,934 18,535 (92) 69 0 30 17.5

4 4 6,467 12,920 19,387 (944) 93 0 7 33.5

* Values in parentheses are negative values.



### Table 11.4.6 SPV AC <65,000 Btu/h: LCC an d PB P Results for Temporary Office

(Con s truction and Mining) Customers

TSL Efficiency

Level

Number Life

- Cycle Cost, All Customers Life

- Cycle Cost Savings

Payback

Period,

Median

years Installed

Cost

2013$ Total

Discounted

Operating

Cost

2013$ LCC,

All

Customers

2013$ Affected

Customers'

Average

Savings

2013$ * % of Customers that Experience

Net

Cost

% No Impact

% Net

Benefit

%

Baseline 4,847 9,088 13,935

1 1 4,991 8,970 13,962 (27) 54 26 20 13.8

2 2 5,136 8,866 14,002 (60) 76 1 23 14.7

3 3 5,601 8,770 14,371 (429) 97 0 3 26.7

4 4 6,467 8,799 15,265 (1,323) 100 0 0 55.0

* Values in parentheses are negative values.



### Table 11.4.7 SPVAC <65,000 Btu/h: LCC and PBP Results for High Discount Rate

Companies

TSL Efficiency

Level

Number Life

- Cycle Cost, All Customers Life

- Cycle Cost Savings

Payback

Period,

Median

years Installed

Cost

2013$ Total

Discounted

Operating

Cost

2013$ LCC,

All

Customers

2013$ Affected

Customers'

Average

Savings

2013$ * % of Customers that

Experience

Net

Cost

% No

Impact

% Net

Benefit

%

Baseline 4,795 11,593 16,388

1 1 4,939 11,348 16,287 101 26 26 48 7.9

2 2 5,083 11,127 16,210 153 38 1 61 8.3

3 3 5,546 10,881 16,427 (66) 64 0 36 14.3

4 4 6,407 10,821 17,228 (867) 90 0 10 28.1

* Values in parentheses are negative values.11 -8 

### Table 11.4.8 through Table 11.4.10 show the detailed LCC and PBP impacts of

SPVHP <65,000 Btu/h equipment on the individual customer subgroups.

Table 11.4.8 SPVHP <65,000 Btu/h: LCC and PB P Results for Education Customers

TSL Efficiency

Level

Number Life

- Cycle Cost, All Customers Life

- Cycle Cost Savings

Payback

Period,

Me dian

years Installed

Cost

2013$ Total

Discounted

Operating

Cost

2013$ LCC,

All

Customers

2013$ Affected

Customers'

Average

Savings

2013$ % of Customers that Experience

Net

Cost

% No Impact

% Net

Benefit

%

Baseline 5,363 34,186 39,549

1 1 5,529 33,580 39,109 440 0 26 74 3.8

2 2 5,695 33,197 38,891 549 0 1 99 4.6

3 3 6,224 32,155 38,379 1,056 0 0 100 6.1

4 4 7,210 32,140 39,350 83 55 0 45 12.7



### Table 11.4.9 SPVHP <65,000 Btu/h: LCC and PB P Results for Temporary Office

(Construction and Mining) Customers

TSL Efficiency

Level

Number Life

- Cycle Cost, All Customers Life

- Cycle Cost Savings

Payback

Period,

Median

years Installed

Cost

2013$ Total

Discounted

Operating

Cost

2013$ LCC,

All

Customers

2013$ Affected

Customers'

Average

Savings

2013$ * % of Customers that Experience

Net

Cost

% No Impact

% Net

Benefit

%

Baseline 5,363 25,558 30,921

1 1 5,529 25,133 30,662 259 0 26 74 4.2

2 2 5,695 24,889 30,584 274 2 1 97 5.4

3 3 6,224 24,103 30,328 527 16 0 84 6.3

4 4 7,210 24,131 31,342 (488) 83 0 17 14.5

* Values in parentheses are negative values.



### Table 11.4.10 SPVHP <65,000 Btu/h: LCC and PB P Results for High Discount Rate

Co m panies

TSL Efficiency

Level

Number Life

- Cycle Cost, All Customers Life

- Cycle Cost Savings

Payback

Period,

Median

years Installed

Cost

2013$ Total

Discounted

Operating

Cost

2013$ LCC,

All

Customers

2013$ Affected

Customers'

Average

Savings

2013$ * % of Customers that Experience

Net

Cost

% No Impact

% Net

Benefit

%

Baseline 5,363 29,455 34,818

1 1 5,529 28,945 34,474 342 0 26 74 4.1

2 2 5,695 28,634 34,329 403 2 1 97 4.8

3 3 6,224 27,735 33,959 769 10 0 90 6.2

4 4 7,210 27,739 34,949 (222) 69 0 31 13.6

* Values in parentheses are negative values.11 -9 

### REF ERE NCES

1. Damodaran Online. The Data Page: Cost of Capital by Industry Sector . 2014. (Last

accessed February 2014.) < http :// p ages.stern.nyu .edu/~adamodar / >

2. Morningstar, Inc. Ibbotson SBBI 2013 Classic Yearbook: Market Results for Stocks, Bonds,

Bills, and Inflation 1926-2012 . 2013. Chicago, IL.