# Cost Effectiveness of Particulate Standards under the Proposed NSPS for Residential Wood Heaters

Overview of Manufacturer Cost & Emission Reduction Estimates

P resented to the Northeast States for Coordinated Air Use

Management (NESCAUM)
M arch 28, 2014

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# Steps used to estimate Cost Effectiveness 1) R&D Cost per Appliance Model : We estimated Annualized R&D cost based on industry cost estimates and a 6

- year research & development period to derive an average annual cost to develop and bring to market each firebox model 2) Nationwide Manufacturer Cost : We used the estimated annual R&D cost per model plus ongoing certification and reporting & recordkeeping costs to estimate the total nationwide Manufacturer Cost for each appliance type 3) Appliance Emissions : We used EPA’s Residential Wood Combustion (RWC) Tool and adjusted emission factors to derive PM2.5 Appliance Emissions

– that is, estimated tons of particulate emissions from each appliance type per year

– under both baseline and proposed standard scenarios 4) Annual Emissions : We used the estimated annual appliance emissions plus shipment data (from industry

- based market research by Frost & Sullivan) to derive total PM2.5 Annual Emissions from all newly

- sold appliances under baseline and proposed NSPS scenarios, starting in 2008 onward 5) Cost Effectiveness : We used the nationwide manufacturer cost estimates (from #2 above) combined with the annual baseline and NSPS emission estimates (from #4 above) to derive the dollars ($) per ton of particulate reduced each year, as well as the cumulative dollars($) per ton of particulate reduced over appliance lifespans

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# Annualized R&D Based on a range of industry

- provided information, we estimated the average cost to develop a 4

- firebox model line to be $1,425,000 or $356,250 per model :

o $850,000 for salaries ($160,000/year for 2 full time employees for 5.3 years) o $50,000 for laboratory equipment (less expensive for R&D than using testing lab) o $25,000 for prototypes (~8 prototypes at $700 for each of 4 fireboxes) o $45,000 for test fuel (150 tests for each of 4 fireboxes at $50 for crib + cordwood) o $150,000 for testing services (includes emissions, efficiency, & safety testing ) o $160,000 for outside consultants (300 hrs/year at $40,000 for 4 years) o $120,000 for re

- tooling (new molds & jigs for $30,000 for each of 4 fireboxes) o $25,000 for marketing (new photos, websites, owner’s manuals) We annualized costs using a 6

- year amortization period for indirect (non

- labor) costs because several manufacturers estimated that 14 to 18 months are required to develop a new firebox, but 5 to 6 years of intensive engineering and R&D efforts are needed for a model line of 4 fireboxes ready

- for

- manufacture. Average cost per model = $63,850 annualized over 6 years (at 7% interest rate) 3

# M anufacturer Cost We calculated nationwide annual R&D costs for each appliance type as: (Annualized R&D cost)*(total # models)*(fractio n of models r equiring R&D) Note: “fraction of mode ls requiring R&D” are those m odels tha t don’t already m ee t Ste p 2 T

o this we added ongoing certification costs plus reporting & recordkeeping costs (for all appliances except wood stoves which already have to certify and report)
B ased on the following assumptions: o 125 wood stove models; o 125 pellet stove models; o 20 single burn rate stove models; o 50 forced air furnace models; o 120 hydronic heater models; o $10,000 to certify each wood stove, pellet stove, and single burn rate stove model o $20,000 to certify each forced air furnace and hydronic heater model o Reporting & recordkeeping (R&R) costs estimated in the ICR Supporting Statements pe r N SPS Subpart
N ote the large number of models which does not take likely model consolidation into

account. Fewer models would significantly decrease a manufacturer’s total R&D costs. 4

# Residential Wood Combustion (RWC) Tool

We estimated PM 2.5 

### emissions from each appliance type using EPA’s RWC Tool, a Microsoft Access® based database considered the most comprehensive, transparent, and flexible database tool available to estimate nationwide wood heater emissions. The RWC tool allows state, local, and tribal agencies to update parameters at the county level and provide locally

- specific emission estimates. The tool includes queries to recalculate emissions.
Emissions = n × b × d × EF, where n = number of appliance (Census AHS data refined with study & industry data); b = burn rate of appliance (includes adjustment for warmer states); d = wood density (converts cords of wood burned to tons of wood burned); and EF = emission factor in lbs pollutant/tons of wood burned (based on AP

- 42 factors and test data)

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# Appliance Emissions
For each appliance type, we used the RWC queried tallies for the total number of appliances, the total tons of wood burned, and the baseline emission factor.
W e adjusted the baseline RWC inventory and emission factors by deleting non

- certified stoves (which cannot be sold), by calculating the weighted average of the AP

- 42 emission factors for freestanding and insert cat and non

- cat wood stoves, and by reducing the baseline emission factor where warranted to not overstate reductions (to reflect, for example, that new shipments of woodstoves will meet the current Washington state limits even without the NSPS). We assumed that single burn rate stoves have the same emission factor as freestanding non

- certified woodstoves.
F or each appliance type, we calculated annual emissions per individual appliance as: Tons PM 2.5 per appliance/year = (Total tons wood burned)*(Adjusted RWC Emission Factor) / (Number of appliances) We adjusted the baseline emission factors to represent the proposed NSPS stepped standards, as described in the “ Emissions M emo” (link on Slide 1 2 ), a nd used the s ame a bove e quatio n to estimate e missions pe r appliance unde r the propose d standards.
N ote: To the degree that wood consumption and wood heater use increase (as the most recent EIA data* show), the baseline emissions per heater will be greater and the potential emissions reductions will be greater for the proposal. (*See final slide for link to data)

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# Shipment Baseline: Frost & Sullivan Market Research

• We hired Frost & Sullivan (F&S) to assess the residential wood heating products market in North America including size of the 2006 through 2008 market by revenues and shipments, growth trends, and market projections through 2015. F&S’ current (2008) and forecasted market assessments are based on primary research

– interviews with industry

– supplemented with secondary sources.

• Based on their market research, F&S prepared a revenue forecast for the residential wood heating market with 2008 as the base year and annual revenue growth/contraction predictions for years 2009 through 2015, including a predicted compound annual growth rate (CAGR) for these years.

• F&S provided current market size by revenue and by unit shipments for wood stoves, pellet stoves, biomass stoves, hydronic heaters, masonry heaters and fireplaces, as well as manufacturer’s average price and price range, installation cost, and fuel consumption for each of these appliance categories (2008 data). Forced air furnaces were not part of F&S’ assessment.

• Other Key Findings from F&S market research include: o Exceptional growth in the residential wood heating market in 2008, with a 16.4% revenue growth over 2007 o A predicted downward turn in 2009 and 2010 due to the economic crisis and drop in oil prices o Positive growth predicted after 2010 due to volatile prices of natural gas and heating oil o Demand for wood heaters strongly tied to price of oil and natural gas, making forecasting by industry difficult o Too

- strict emission regulations will require large R&D investments which will drive unit prices up and potentially cause some manufacturers to go out

- of

- business o There is a need for a testing procedure which reflects real world homeowner use o Lack of a comprehensive national standard is problematic for industry o Most of industry advocates change

- outs and consumer education regarding moisture content & appliance operation o While demand is expected to increase across North America, the greatest demand is expected to continue to be in the Northeast US and eastern Canada

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# Annual Emissions
Annual Shipments : We used F&S data for 2008 shipments by appliance category with F&S forecasts for 2009 and 2010, incorporating the weak economy. For years 2011 through 2038 we used a revenue growth rate of 2% in keeping with the annual average growth in real GDP predicted by the US Bureau of Economic Analysis. (F&S had predicted a CAGR of 4.1% from 2009 through 2015.) Baseline Emissions : We calculated baseline emissions by multiplying Annual Shipments by the baseline Appliance Emissions for each appliance type (Slide 6).
NSPS Emissions : We calculated emissions under the proposed NSPS standards (with Step 1 predicted in 2014 and Step 2 in 2019 at the time of this analysis) by multiplying Annual Shipments by the NSPS Appliance Emissions for each appliance type (Slide 6). For each year: Emission Reduction = Baseline Emissions – NSPS Emissions Emission reductions in this analysis depend on our annual shipment projections and on the adjusted

- from

- baseline emission factors

. If shipments are higher than modeled here, then actual emission reductions will be higher (and costs per stove lower). Note that potential NSPS

- caused effects on shipments/sales (e.g., reduced sales, market shifts among appliances) are not modeled. The modeling of such potential economic effects were outside the scope of this analysis.
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# Model Design & Appliance Emitting Lifespan

We assumed a 20

- year model design lifespan . Some models developed for the 1988 NSPS are still being sold (after 25 years) and many “new” models still have the same internal working parts with merely exterior cosmetic changes.
We also assumed a 20

- year appliance emitting lifespan . Most wood heaters in consumer homes emit for at least 20 years and often much longer. In keeping with the 20

- year model design life, our cost effectiveness analysis tracks new shipments and costs for 20 years after Step 2 becomes effective. We then track emissions (from stoves in consumer homes) for another 20 years, in keeping with the 20

- year appliance emitting lifespan. Thus, we assume that a stove shipped in the 20 th 

### year of model design life (20 years after Step 2) will be emitting in home for another 20 years , making the final year of our cost effectiveness analysis 40 years after Step 2.

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# Cost Effectiveness (CE) Spreadsheets We used the nationwide manufacturer cost estimates (Slides 3 through 4) combined with the annual baseline and NSPS emission estimates (Slides 5 through 8) to derive the dollars per ton of particulate reduced each year, as well as the cumulative dollars per ton of particulate reduced over the appliance lifespans. We estimate costs and shipments for 20 years past Step 2, which would be 2038 (assuming Step 2 had become effective in 2019). And we estimate emissions for 20 years past 2038, which would be 2057 (inclusive). The CE analysis incorporates “trailing emissions” as part of our 20 year emitting lifespan assumption. For example, our analysis assumes that a stove shipped in 2015 will emit in homes for 20 years

– or until 2034 (inclusive), but does not model emissions past these 20 years. We therefore drop emissions from this stove in our analysis in year 2035. Likewise, we drop emissions for a stove shipped in 2016 in year 2036, and so on. The total cost ($) in the final CE estimate (at bottom right of each CE spreadsheet) is based on the summed annual costs over the 20 year model lifespans

– beginning one year prior to Step 1 through 20 years after Step 2. The total emission reduction (tons PM 2.5 

### ) is based on the 20 year emitting lifespan of each shipped model, through 40 years after Step 2, and accounts for trailing emissions.

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# Notes on Alternative Approach

• Under the alternative 3

- step approach, due to the larger time lag between steps 1 and 3, we assumed two rounds of R&D for all appliances (except masonry heaters).

• For the second round of R&D we assumed manufacturers would not need to purchase new lab equipment, therefore the annualized R&D is slightly lower.

• In order to not underestimate the level of R&D which may result from a 3

- step limit phased in over 8 years, we made the assumption that after meeting the interim stepped limit (3 years after the initial limit), all manufacturers would begin a second round of R&D for 80% of their models

– i.e., we assumed that only 20% of models achieve the most stringent limit in the first round of R&D

• This assumption caused an “overlapping” two

- year period of NSPS

- related R&D amortized costs

• As under our proposed approach, we assumed no model consolidation (even though model consolidation will likely occur). Therefore our estimated costs are conservative, tending to err on the high side.

• The formulas we applied based on the above assumptions are visible in the Cost Effectiveness Alternative Approach spreadsheets in the docket.

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# Links to all Cited Documents

All information presented is available in the Supporting Documents of the Residential Wood Heater NSPS Docket at http ://www.regulations.gov/#! docketBrowser;rpp=100;so=ASC;sb=docId;po=0;dct=SR;D=EPA

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- 0734 Cost Effectiveness PM 2.5 Proposed Approach Spreadsheets: http ://www.regulations.gov/#! documentDetail;D=EPA

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- 0019 Cost Effectiveness PM2.5 Alternative Approach Spreadsheets: http ://www.regulations.gov/#! documentDetail;D=EPA

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Emissions Memo: http://www.regulations.gov/#! documentDetail;D=EPA

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- 0005 Manufacturer’s Cost Impact Memo: http://www.regulations.gov/#! documentDetail;D=EPA

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Unit Cost Memo: http://www.regulations.gov/#! documentDetail;D=EPA

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Cost Effectiveness Memo: http://www.regulations.gov/#! documentDetail;D=EPA

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- 0002 Residential Wood Combustion Tool Overview (presentation slides): http ://www.regulations.gov/#! documentDetail;D=EPA

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- 0179 Residential Wood Combustion Tool ( Access database too large for download; available at EPA Docket Center or by request): http ://www.regulations.gov/#! documentDetail;D=EPA

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- 0366 Frost & Sullivan 2010 Residential Wood Heating Market Study : http ://www.regulations.gov/#! documentDetail;D=EPA

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- 0026 Energy Information Administration (EIA) Data: http :// www.eia.gov/todayinenergy/detail.cfm?id=15431

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