11-i 

CHAPTER 11. CONSUMER SUBGROUP ANALYSIS 

TABLE OF CONTENTS

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

11.2 SINGLE PACKAGE VERTICAL UNIT CUSTOMER SUBGROUPS ....................... 11-1

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

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

REFERENCES .......................................................................................................................... 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, SPVAC 

<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 PBP 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 PBP 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 

Companies.......................................................................................................... 11-8
11-1 

CHAPTER 11. CONSUMER SUBGROUP ANALYSIS

11.1 INTRODUCTION

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

examines impacts of energy conservation standards on purchasers of the affected products. In 

analyzing the potential impact of new or amended standards on residential, industrial, and 

commercial customers, the U.S. Department of Energy (DOE) further evaluates the impact on 

identifiable groups of customers (i.e., subgroups) that may be disproportionately affected by a 

national standard level. The subgroup analysis evaluates impacts by analyzing the LCCs and 

PBPs for subgroups of customers. For its analysis of single package vertical air conditioners and 

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

public education customers, temporary office customers, and small businesses. 

Because DOE did not conduct its LCC and PBP analysis with a sample of single package 

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

subgroup analysis. Instead, DOE varied certain inputs to the LCC and PBP calculations to 

approximate the impacts of potential standards on the considered subgroups. This chapter 

describes the subgroup analysis 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 LCC and PBP analyses for three identifiable subgroups of SPVU 

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

1. Public education customers, 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 burdensome than the average customer. However, 

government entities also often see lower electricity prices. In the case of air 

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

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

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

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

2. Temporary office customers 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

from SPVU equipment less attractive than the average customer. However, their 

(temporary office) buildings on average also experience relatively high electricity 

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

relatively high. In the case of air conditioning, these customers use 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. Businesses that experience higher capital costs than the industry average 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 capital 

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 businesses 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 analysis separately for customers 

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

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

average commercial customers. DOE also conducted 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 (see 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 FOR SMALL BUSINESSES

The Small Business Administration (SBA) defines a small business by its annual receipts 

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

businesses that might purchase SPVU equipment. 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 

database1

 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 capital 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: construction and mining, general office and retail, and 

telecommunications. 

To estimate discount rates for small companies that purchase SPVU equipment, DOE 

used the same methodology as for the general population of SPVU equipment customers as 
11-3 

presented in chapter 8.

a However, for small companies, particularly very small companies, 

historical 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 premium to the 

cost of equity for small firms:

ke = R f + (β × ERP) + S

Eq. 11.1 

Where:

ke = cost of equity, 

Rf = expected return on risk-free assets,

β = risk coefficient of the firm, 

ERP = equity risk premium, and 

S = size premium.

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 

implies 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 “small 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 the real weighted average cost of capital (WACC) for businesses in the 

Damodaran data set whose WACC was 1.031 times the industry average or higher and repeated 

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

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

these firms) is between 1.59 and 1.89 percent based on data from Damodaranc (see Table 11.3.1).

 

a DOE assumed for each business type that businesses with high costs of capital are a reasonable proxy for small 

businesses that use SPVU equipment. 

b In this calculation, small companies were companies in the smallest 10 percent (decile) size class based on market 

capitalization. Average market capitalization for the smallest firms was $86.7 million, the average Ibbotson 

definition of 1,361 decile 10 companies. In 2013$, this would be about $90.8 million. c The database from chapter 8 for the three industries used for this analysis includes 337 companies, 148 of which

meet the 1.031 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 Rate 

%

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 small business 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 same subgroup 

types for SPVHP <65,000 Btu/h equipment. The tables provide the average or mean LCC, the 

LCC savings or costs relative to the base case, and the percentage of customers who are 

burdened with net costs or who realize net savings. The median PBPs are also provided. The 

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

shipments.

In general, the benefits of moving to a higher efficiency level are less in the case 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 indicates 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, this 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 effects 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 faring 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 customers save slightly less energy than 

the average customer, and their higher discount rate makes these savings worth 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 Customer 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 5,185 410.63 496.15 553.00 553.00
11-6 

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 Subgroups 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 

Customers, 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 PBP 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 SPVAC <65,000 Btu/h: LCC and PBP 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 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 PBP 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 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 PBP 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 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 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 

REFERENCES

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

accessed February 2014.) <http://pages.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.