Commonwealth Solar

To achieve Governor Patrick's goal of250 MW ofsolar PV installed in Massachusetts by 2017,

DOER and the Renewable Energy Trust have established Commonwealth Solar. Begun in

January 2008, Commonwealth Solar provides rebates for solar installations for residences,

businesses, and public buildings backed by $68 million of existing renewable energy funds. As

the rebate program expires, Commonwealth Solar will transition to other forms ofsupport for

solar power, such as the solar carve-out within the Renewable Energy Portfolio Standard, as

provided for in the Green Communities Act. In addition, the Commonwealth Solar goal will also

be met by the new opportunity for our regulated utilities to own and implement solar

photovoltaic (PV) generation installations. In the first year ofits implementation,

Commonwealth Solar doubled the installed capacity ofPV in the state, and is on the road to

quadrupling by the end ofthis year.

Electric Utility Long-Term Contracts for Renewable Energy

The Green Communities Act requires that the electric distribution companies solicit proposals

from renewable energy developers and enter into cost-effective long-term contracts for

renewable energy, in order to facilitate the financing ofrenewable energy generation within the

Commonwealth, including state waters, or in adjacent federal waters. Long-term contracts assist

renewable energy developers in obtaining financing, by providing assurance ofrevenues from

sales over a number offuture years. Since the restructuring of energy markets in Massachusetts,

power contracts have typically been for only six months to one year, far too short to allow

financing ofthe typically high capital costs involved in developing renewable generating

facilities.

Net-Metering

Net-metering allows electricity customers who install distributed power generation, such as solar

PV (photovoltaics), to sell electricity generated in excess oftheir own electricity consumption

back to the electric distribution company. In the past, net-metering in Massachusetts was limited

to customers whose generation capacity was below 60 kW, with customers paid the wholesale

price for surplus power. The Green Communities Act increases the net-metering capacity limit to

2 MW (about 33 times as high) and increases payments to the customer to the retail price. By

requiring that the market accurately price distributed renewable power generation, net-metering

provides greater revenue for renewabl~ generators, thereby making such installations more costeffective.

12

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Transportation

Federal CAFE Standard for Light Vehicles

The Corporate Average Fuel Economy (CAFE) standard was first enacted in 1975 and was

established to reduce energy consumption by increasing the fuel economy of cars and light trucks

on a fleetwide basis. The fuel economy standards are set by the National Highway Traffic Safety

Administration, with the Environmental Protection Agency calculating the average fuel economy

for each automobile manufacturer. Starting in 2004, the fleet average for passenger cars must

exceed 27.5 mpg, and light trucks must exceed 20.7 mpg. Trucks under 8,500 pounds must

average 22.5 mpg in 2008, 23.1 mpg in 2009, and 23.5 mpg in 2010. In addition, under a

recently-reached agreement between the federal government and California, automakers are

required to meet a 35 mpg fleet-wide average for passenger cars and light duty trucks by 2016-

four years earlier than under the Energy Independence and Security Act of2007. This will

require manufacturer miles per gallon ("MPG") levels that yield similar reductions in GHG

emissions to California's vehicle GHG standards (see section below.)

California Vehicle Greenhouse Gas Standards

Under the federal Clean Air Act, states are preempted from adopting motor vehicle standards

that vary from federal standards, except that California is allowed to adopt motor vehicle

standards and enforce such standards if a waiver is granted by EPA under section 209(b) ofthe

Act. Other states are allowed to adopt California's standards under section 177 ofthe Act.

Massachusetts Department ofEnvironmental Protection ("MassDEP") is required to adopt the

California standards under MGL c. 11 section 142K unless such standards will not achieve

greater emission reductions than federal standards. As a result, in December 2005, MassDEP

adopted California's GHG standards for passenger cars, light duty trucks, and medium duty

vehicles under the low emission vehicle (LEV) program regulations, 310 CMR 7.40. The

standards apply to model year 2009 and newer vehicles and will be fully phased-in for model

year 2016. The standards·can be met through reduction of vehicle-associated GHG in 4 areas:

(1) tailpipe emissions of carbon dioxide (C02), methane (CI-4) and nitrous oxide (N20); (2)

tailpipe emissions incurred by the load ofrunning air conditioning; (3) air conditioning system

refrigerant leaks; and (4) upstream emissions associated with the production offuel. Nationwide,

by calendar year 2020, California's more stringent limits will reduce cumulative GHG emissions

in California and other LEV states by 450 MMTC02e.

Federal Renewable Fuel Standard

Title II ofthe federal Energy Independence and Security Act of2007 creates a "renewable fuel

standard," which requires that such fuel used in the U.S. will rise from 4.7 billion gallons in 2007

to 36 billion gallons in 2022. Ofthat, "advanced biofuel" must rise from 0.6 billion gallons in

2009 to 21 billion gallons in 2022, and cellulosic biofuel must rise from 0.1 billion gallons in

2010 to 16 billion gallons in 2022. Renewable fuels must be produced from renewable biomass,

13

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
replace other transportation fuel, and achieve at least a 20% reduction in greenhouse gas

emissions on a lifecycle basis for "new facilities. II (Existing facilities, and expansion ofsuch

facilities, such as those producing com-based ethanol, are exempt from the greenhouse gas

criterion.) Advanced biofuel excludes ethanol derived from com starch, and must Yield at least a

50% lifecycle reduction in greenhouse gas emissions, while cellulosic biofuel must achieve a

60% reduction. The law contains provisions allowing the EPA administrator to reduce both the

percentage greenhouse- gas reductions and the volumes of production required. The three

categories are not additive -- cellulosic fuel counts as part of advanced fuel, and both count as

part ofthe renewable fuel mandate.

Tax Exemption for Cellulosic Biofuel

Section 1 ofthe Clean Energy Biofuels Act, 2008 Mass. Acts. Ch. 206, exempts cellulosic

biofuel from the state's gasoline tax. This includes both ethanol derived from cellulosic sources

and any other fuel derived from cellulosic sources that can be used in place of gasoline (or as

part of a blend). To be eligible for the tax exemption, the biofuel must yield at least a 60%

reduction in lifecycle GHG emissions relative to petroleum-based fuel sold in 2005 (the same

definition is used in Renewable Fuel Standard provisions ofthe 2007 federal energy law). The

tax exemption went into effect on Jan. 1, 2009, although no such fuel is yet being supplied in the

state.

Low Carbon Fuel Standard

Section 6 ofthe Clean Energy Biofuels Act requires the state to work toward implementing a

low carbon fuel standard (LCFS) for transportation fuels among the northeast states

participating in the Regional Greenhouse Gas Initiative (RGGI). A LCFS, which is an idea first

put into law by Executive Order in California, would require that the average carbon content of

transportation fuels be reduced by a specific percentage by some future date. The Act requires

that the GHG emissions be measured on a "full fuels cycle basis" (meaning the entire lifecycle)

and that a progressively more stringent standard be set so that a 10% reduction in emissions is

achieved. The state is also directed to make use of analysis done by the California Air Resources

Board, if applicable, to determine the carbon intensity of different fuels. At present NESCAUM

(Northeast States for Coordinated Air Use Management) and MassDEP are leading regional

discussions among the northeast states to develop a plan for a LCFS. In December 2008

environmental commissioners from the RGGI states and Pennsylvania signed a letter ofintent to

develop a memorandum of understanding by the end of 2009 concerning the structure of a

regional LCFS.

Mandate for Biofuels Use in Diesel Motor Fuel and Home Heating Oil

Sections 2 and 3 ofthe Clean Energy Biofuels Act instructs DOER to require that a percentage

of both diesel motor fuel and home heating oil (number 2 oil) consist offuel derived from

renewable biomass, which must also yield at least a 50% reduction in lifecycle GHG emissions

14

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
relative to petroleum-based fuel sold in 2005. The fraction begins at 2% on July 1,2010, and

grows to 5% by July 1,2013. However, the Commissioner ofDOER is empowered to delay the

requirement ifsufficient supplies of eligible fuel are not available, due to lack ofsupply, lack of

blending facilities, or unreasonable cost. The mandate sunsets if and when a low carbon fuel

standard that achieves equal or greater reductions in GHG emissions goes into effect. DOER

shall also consider the feasibility of extending the mandate to number 4 and number 6 petroleum

distillate fuels. Finally, DOER is instructed to study the feasibility ofmaking the mandate apply

on a statewide average basis, rather than on each gallon offuel sold, making possible the

development of a credit trading system. At present, the California Air Resources Board, on

which Massachusetts has planned to rely (along with federal EPA) for estimates ofthe

percentage lifecyc1e GHG reductions due to biofuels derived from different feedstocks and

manufactured in different ways, has not yet completed its analysis.

Commonwealth Capital (Smart Growth/Smart Energy) Policy

Commonwealth Capital explicitly endorses 32 land use planning and regulation practices that are

consistent with the Commonwealth's Sustainable Development Principles. (see

http://www.mass.gov/?pageID=gov3subtopic&L=5&LO=Home&Ll=Key+Priorities&L2=Job+C

reation+%26+Economic+Growth&L3=Clean+Energy+%26+Smart+GrowthSmart+Energy&L4=Commonwealth+CapitaI&sid=Agov3) The program makes available more

than $600 million annually in grants and low interest loans for a variety of capital investments, in

part based on Commonwealth Capital scoring. The more smart growth/smart energy oriented a

community is, the more likely it is to receive funding. Almost 300 (out of351) ofthe

Commonwealth's communities have applied for funding, and municipal consistency with the

Sustainable Development Principles has improved significantly, up 10% over the past five years,

with the·median score rising from 63 to 77 (out of a possible 140).

Sustainable Development Principles

The Patrick Administration utilizes a set of Sustainable Development Principles to guide the

creation and implementation ofstate agency policies and programs, as well as investments in

land and infrastructure. Municipalities, through policies like Commonwealth Capital, are also

asked ·to modifY their planning, regulatory, and funding actions to achieve consistency with the

Principles. The state's Sustainable Development Principles include promoting clean energy, in

the form of energy efficiency and renewable power generation, in order to reduce greenhouse gas

emissions and consumption offossil fuels. They also encourage the creation of "pedestrianfriendly" districts and neighborhoods that mix commercial, civic, cultural, educational, and

recreational activities with parks and homes. In regard to housing, the Principles call for building

homes "nearjobs, transit, and where services are available."

15

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Appendix A-Summary of 2008 Legislation

Green Communities Act, 2008 Mass. Acts Ch.169, 7/2/08

This Act significantly reforms the state's energy policy, and makes large, new commitments to

electric and natural gas energy efficiency programs, renewables, and clean fossil fuels like

combined heat and power. (Section 116 sets state renewable, alternative and energy efficiency

goals.) The Act requires the Executive Office ofEnergy and Environmental Affairs (EOEEA) to

prepare a 5 year plan to meet the energy efficiency and renewable/alternative energy goals.

Global Warming Solutions Act, 2008 Mass. Acts Ch. 298,8/7/08

This Act will spur investments in energy efficiency and conservation, encourage more renewable

power and developments of clean energy. The Act creates a new set of enforceable state limits

on greenhouse gas (GHG) emissions across all sectors ofthe economy. By 2050, it requires

adoption of GHG emissions limit that is at least 80% below 1990 GHG emissions. By 2020,

emissions are limited between 10 and 25 percent below 1990 levels, as set by EOEEA who also

develops a plan by January 1,2011 for meeting that limit by January 1, 2011 and adopts interim

limits for 2030 and 2040.

Green Jobs Act, 2008 Mass. Acts Ch. 307, 8/11/08

The gradual reduction of emissions levels will spur innovation and entrepreneurship in clean

energy technologies across the economy. To facilitate the innovation and economic

development necessary to meet those mandates, the Green Jobs Act will support research-anddevelopment, entrepreneurship, and workforce development in the clean-energy technology

industry ofthe future. Thus, this Act works to help Massachusetts meet goals for reducing

greenhouse gas emissions.

Clean Energy Biofuels, 2008 Mass. Acts Ch. 206, 7/28/08

This Act will help with GHG emission reductions, lessen our dependency on oil and diversify

our fuel mix. Beginning in July 2010, the Act requires the use of2% biodiesel (or other

qualified petroleum sl;lbstitute biofue1) in #2 oil for residential, commercial and industrial heating·

applications, and in diesel fuel; the percentage increases to 5% no later than July 1, 2013. The

Act prescribes the use of "advanced biofuels" as characterized by at least a 50% reduction in

greenhouse gas emissions relative to conventional fuel, inclusive ofindirect land use change

impacts.

Ocean Management Act, 2008 Mass. Acts Ch. 114, 5/28/08

The goal ofthe Act is to establish a comprehensive plan to manage development in and the use

of Massachusetts' ocean waters, balancing natural resource preservation with traditional and new

uses, including renewable energy. It is not intended to create a new bureaucracy or permitting

16

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
process, but instead seeks to provide unifonn guidance to the current regulatory agencies in their

review of ocean uses and projects.

17

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
ATTACHMENT C

THE COMMONWEALTH'S GAS FORECAST

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Massachusetts Department of Energy Resources

Massachusetts Retail Natural Gas

Forecast, 2009-2015

Introduction

The Massachusetts Department of Energy Resources ("DOER") presents the forecast of retail

natural gas sales for the years 2009 - 2015, as part of its State Energy Plan. This forecast indicates the

scope and scale of natural gas sales for the purpose of estimating the extent and impact of energy

efficiency programs throughout the forecast period.

Data Sources and Methods

The forecast was developed for DOER by Optimal Energy of Bristol Vermont, and is based on the

following sets of sales data:

1. Actual retail gas sales of each Massachusetts gas utility, obtained through a survey

conducted by Optimal Energy;

2. Review of the Energy Information Administration's ("EIA") Annual Energy Outlook, which

periodically publishes long term forecasts of natural gas expected sales; and

3. Review of EIA's Short Term Energy Outlook report, which provides more frequent

sampling of the gas market and was used by Optimal Energy, along with the other data

sources, to construct an annual growth rate specifically for the Massachusetts gas

utilities. Subsequent forecast revisions would use a similar method of long and short

term forecasts, corrected by actual sales data provided by the utilities to increase

forecast accuracy.

Eligible and Non~EligibleSales

The report categorizes gas sales into "Eligible" and uNon-Eligible" categories. Eligible sales are

those for which energy efficiency charges may be collected and for which customers may participate in

the programs. Non-Eligible sales include certain transportation sales and sales to some large customers

who are exempted via regulation from recovery for energy efficiency costs.

Massachusetts Natural Gas Sales Forecast 2009-2015 September 30, 2009 Page 1

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Forecast

The chart below shows expected Eligible and Non Eligible sales through 2015.

Massachusetts Gas Retail Sales Forecasts 2009-

2015

2.40

2.35

2.30

2.25

til

E 2.20 ....

QJ

.c

I- 2.15 s::

Cii 2.10

2.05

2.00

1.95

1.90

r------~-~._._- ..--.-.--~--------~.-. .

j

i

i

i-----------------~~-.--.-.---.---.--..- i

j

~--~_.~._.~....~_.._--

2009 2010 2011 2012 2013 2014 2015

!II Total Sales Volume (billion therms)

II Eligible sales volume (billion

therms)

Massachusetts Natural Gas Sales Forecast 2009-2015 September 30/ 2009 Page 2

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
ATTACHMENT D

THE OPTIMAL REPORT

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
ITNITED STATES DEPARTMENT OF ENERGY

Report and Analysis in Support of the Commonwealth of

Massachusetts' Petition to Exempt from Federal Preemption

Massachusetts' 90% Annual Fuel Utilization Efficiency

Standard for Non-Weatherized Gas Furnaces.

Preparedfor:

The Massachusetts Department of Energy Resources, a Department of

the Massachusetts Executive Office of Energy & Environmental Affairs

and

Massachusetts Attorney General Martha Coakley

By:

Tom Franks & Alek Antczak

Optimal Energy Inc.

14 School Street

Bristol, Vermont 05443

Phone (802) 453-5100

Fax (802) 453-5001

September 30,2009

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Table of Contents

Page

I. Executive Summary 1

II. Massachusetts Faces Substantially Different Conditions From

Those Prevailing in the United States Generally and Has a

Compelling Need to Implement a New, More Stringent Energy

Efficiency Standard for Non-Weatherized Gas Furnaces 3

A. Massachusetts Has a Higher Heating Load Than the

Average for the Nation as a Whole .3

B. Massachusetts Has Higher Fuel Costs Than The Average

for the Nation as a Whole 3

C. The Energy Burden on Commonwealth Residents is Higher

Than That Prevailing for the Nation Generally 4

D. Natural Gas Use for Residential Heating Has an Impact

on Other Markets 7

E. The Residential Heating Equipment Market is Difficult to

Influe~ce, Particularly for Rental Housing 8

F. Regulatory and Statutory Requirements......... 9

G. Summary...................................................... 10

III. Implementation ofthe Massachusetts Standard Will Not Adversely

Affect the Furnace Market. ............................................................ .. 10

A. Manufacturers Already Produce and Sell Products That Would

Meet the Commonwealth's Proposed Standard 11

1. The National Market Overview Shows Increasing

National Shipments of High Efficiency Furnaces 11

2. Federal ENERGY STAR Program Data Confirms That

High Efficiency Furnaces Are Readily Available......... ......... 13

B. A Massachusetts Market Overview Shows a Steady Increase in

High Efficiency Unit Sales in the Commonwealth, Approaching a

Limit via Voluntary Programs 14

- 1 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
1. Available Historic Data Confinns an Upward

Trend in Sales 14

2. The Market for High Efficiency Furnaces in New

and Existing Homes is SubstantiaL 16

a) Estimate ofthe Size ofthe Replacement Market 16

b) Estimate ofthe Size ofthe New Construction Market 18

3. Massachusetts Market Summary 20

C. Other Market Impacts ofthe Proposed Massachusetts Standard 21

1. The Availability ofConsumer-desired Features Will Not

Be Adversely Effected by the Massachusetts Standard 21

2. Consumers Derive a Strong Net Benefit From the

Application of a More Stringent Furnace

Efficiency Standard 21

3. Installation, Operation, and Maintenance Procedures

Would Not Be Adversely Affected by the Proposed

Massachusetts Standard 23

D. Implementation ofthe Proposed Massachusetts Standard is

Likely to Foster Other States' Adoption of Similar Standards,

Not Disparate Ones 24

IV. Given the Relative Costs and Benefits, New Regulation is Preferable

to the Universe ofAlternatives 26

A. Consumer Rebate Programs - GasNetworks Program 27

B. Low-Income Grant Programs - HEARTWAP 28

C. Tax Incentives 29

D. Consumer Financing Programs - HEAT Loan 29

E. Public Infonnation & Customer Education Campaigns

- Residential Conservation Services 29

F. Alternatives Analysis Conclusion 29

V. Conclusion 30

- 11 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
List of Figures

Figure 1 - Heating Degree Day Comparison 3

Figure 2 - Residential Natural Gas Price Comparison 3

Figure 3 - Residential Natural Gas Prices (US) 4

Figure 4 - Average Energy Cost - Low Income Households 5

Figure 5 - Affordability Gap 6

~igure 6 - Massachusetts Energy Burden 6

Figure 7 - Natural Gas for Generation in Massachusetts 8

Figure 8 - Rental Housing Rates - US 9

Figure 9 - National Shipments 11

Figure 10 - Distribution ofEfficiency 12

Figure 11 - ENERGY STAR Shipments 13

Figure 12 - Time Series Data 14

Figure 13 - High Efficiency Shipments 15

Figure 14 - Housing Unit Size Distribution 17

Figure 15 - Single Family Replacement Market 18

Figure 16 - Single Family and Duplex Replacement Market 18

Figure 17 - Shipments to Housing Starts (National) .19

Figure 18 - Massachusetts New Housing 19

Figure 19 - Estimate ofMA NWGF New Construction Market 20

Figure 20 - GAMA Verified NWGF Shipments 20

Figure 21 - DOE Summary 22

- 111 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Figure 22 - Massachusetts Share ofNational Shipments 25

Figure 23 - Massachusetts Share ofNew England Shipments 25

Figure 24- Estimated Success Rate ofAlternatives 27

Figure 25 - GasNetworks Summary 28

- IVEERE-2009-BT-PET-0024 DOC- ID 1.2.001
I. Executive Summary

Optimal Energy Inc. ("Optimal") was engaged to assist the Massachusetts

Department ofEnergy Resources ("MassDOER"), a Department ofthe Massachusetts

Executive Office ofEnergy & Environmental Affairs, and Massachusetts Attorney

General Martha Coakley (collectively the "Commonwealth"), with an analysis ofthe

potential benefits and consequences ofimplementing the Commonwealth's proposed

efficiency standard for non-weatherized gas furnaces ("NWGF").

In 2005, the Commonwealth's Legislature revised Massachusetts General Laws

("M.G.L.") Chapter 25B, § 5, to provide that to be eligible for sale in the Commonwealth,

NWGF must meet or exceed annual fuel utilization efficiency ("AFUE") of 90 percent.}

Mass. Acts 2005, Ch. 139, Section 11. This is compared to the current preemptive

United States Department ofEnergy ("DOE") standard (hereafter "federal standard") for

NWGF of 80 percent AFUE.2 To implement this standard (hereafter referred to as the

~'high efficiency standard,'~ the "proposed standard," or the "Massachusetts standard"),

federal law requires that the Commonwealth first be granted a waiver from federal

preemption by DOE.

Based on the data collection, research, and analysis that Optimal has done in

connection with its engagement, Optimal has concluded that implementation ofthe

Massachusetts standard is the only feasible approach that would significantly increase the

penetration ofhigh-efficiency furnaces in the Commonwealth; that implementation ofthe

Massachusetts standard would not have a significant, adverse impact on manufacturers or

distributors; and that there is no feasible alternative approach that would increase the

penetration ofhigh-efficiency furnaces to the same degree because the Commonwealth

has already ably implemented all feasible alternatives to the greatest extent possible.

In order to obtain a waiver from federal preemption under § 327(d) ofthe Energy

Policy and Conservation Act ("EPCAIt

) (42 U.S.C. 6297(d)), a petitioning state must

show by a preponderance ofthe evidence that the proposed standard it wishes to

implement is necessary to meet "unusual and compelling State or local energy ...

interests." Optimal has concluded that the Commonwealth meets this statutory standard

because there are applicable conditions that exist in the Commonwealth that are

substantially different from those that prevail in the United States generally. These

differences include, but are not limited to:

• a higher Commonwealth heating load;

• higher Commonwealth heating costs;

• that there is more competition in the Commonwealth for natural gas and

propane resources;

1 A regulation implementing the change in the NWGF AFUE standard was promulgated thereafter at 225

Code ofMassachusetts Regulations ("C.M.R. II

) 9.03.

2 The rule fIrst promulgated in November of2007 was challenged in the Second Circuit, but is now on

remand to DOE for further comment and rulemaking.

- 1 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
• that the Commonwealth is a more difficult market to influence, especially

because ofthe size and configuration ofthe rental housing market;

• that there are specific Commonwealth regulatory and statutory

requirements that must be met; and

• that substantially higher market penetration makes it difficult and less

cost-effective for voluntary programmatic efforts to further influence

market penetration.

These conditions, described below, create a synergistic effect that inhibits the ability of

the Commonwealth to capture significant net benefits without a comprehensive,

statewide, high efficiency NWGF standard.

Through analysis offurnace sales nationally and in the Commonwealth, other

market information, and primary research, we have determined that the proposed

Massachusetts standard will have no significant adverse impact on national

manufacturers, local manufacturers, distributors, or installers. We further found that the

proposed standard will have no adverse impact on furnace features available to

customers.

Finally, we determined that Commonwealth regulation in the fonn of a more

stringent 90% AFUE standard is preferable to the alternatives available to the

Commonwealth. These alternatives include educational efforts, rebate programs, market

channel interventions, and tax mechanisms. Our research determined that the

Commonwealth has already aggressively and comprehensively implemented alternative

approaches to acquiring energy savings from the installation ofmore efficient gas

furnaces.

Optimal has prepared or reviewed numerous studies ofthe potential savings

available from energy efficiency efforts in a wide variety ofjurisdictions, and has

reviewed verified energy savings from programs implemented over the last two decades.

In every case, there is a significant difference between the estimates of cost-effective

savings that could be achieved and the savings that are actually acquired. We are aware

ofno instance where non-regulatory mechanisms have captured all available costeffective savings. In fact, we are aware ofregulatory mechanisms, specifically building

codes in many jurisdictions, that have failed to capture the levels ofsavings expected due

to compliance and enforcement issues. Taking all ofthis information into consideration,

it is our professional opinion that the Commonwealth's previous non-regulatory efforts

may have raised the penetration of90% AFUE NWGF to the theoretical maximum levels

absent such regulation.3

3 Potential studies and program evaluations rOlltinely show that at least twenty percent ofthe possible

market for high efficiency furnaces is not captured by program interventions.

- 2 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
II. Massachusetts Faces Substantially Different Conditions From Those

Prevailing in the United States Generally and Has a Compelling Need to

Implement a New, More Stringent Energy Efficiency Standard for NonWeatherized Gas Furnaces.

A. Massachusetts Has a Higher Heating Load Than the Average for the

Nation as a Whole.

A common measure ofheating load is "heating degree days" ("HDDtt), defined as

the difference between the mean temperature and 65 degrees Fahrenheit on a daily basis.

As shown in Figure 1 - Heating Degree Day Comparison, below, residents in the

Commonwealth face significantly colder weather than the average for the Nation as a

whole.4

Igure 1 H- eatmS?; Degree D C ay ompanson

Heating De2ree Days - Massachusetts and Contiguous United States

Year 2000 2001 2002 2003 2004 2005 2006 2007

US 4398 4160 4278 4469 4241 4246 3915 4259

MA 6253 5803 5884 6704 6463 6467 5709 6295

MA as % of US 142% 1390/0 138% 150% 152 % 1520/0 1460/0 148%

Source: NOAA National Data Center - Climate Data Online.

There is a direct correlation between HDD and fuel use. All other things being

equal, the higher the HDD total for an area, the more fuel will be required to maintain

acceptable interior temperatures. It is significant that the Commonwealth averages

approximately 40% more heating degree days than the rest ofthe Nation. Due to the

physics of heat transfer, this translates directly into greater fuel usage and a higher public

interest in efficiency than exists in the Nation as a whole,

B. Massachusetts Has Higher Fuel Costs Than The Average for the

Nation as a Whole.

The Commonwealth has substantially higher natural gas costs than- those

prevailing in the United States generally. The chart and table below (Figures 2 & 3) were

generated from data published by DOE's Energy Information Administration C'EIA")5.

F·l1!ure 2 R- eSI'denfiNla aura t I Gas P'rice Companson

MA Residential Delivered Natural Gas Price compared to the National Avera~ e since 2000

Year 2000 2001 2002 2003 2004 2005 2006 2007

MA as % ofNat'1Average 125% 129% 119% 128% 130% 1]9% 123% 121%

MA as % ofNat'1Median 130% 132% 124% 133% 133% 121% 124% 121%

4 Source: http://www7.ncdc.noaa.gov/CDO/CDODivisionaISelect.jsp, accessed 1/30/09

5 http://tonto.eia.doe.gov/dnav/ng/ngprisumaepgOprsdmcfa.htm

- 3 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Figure 3 - Residential Natural Gas Prices (US)

Residential Delivered Natural Gas Price by State (2006)

22

20

1i)

(I)

- 18 0

:s

:J

0 16 0

0

q 14

0

12

10

•

Mt- •• ......... •••••

•••

••••••••••

••••• .... •••••

•••• -•, I I I I

Note: Alaska has the lowest and Hawaii has the highest natural gas prices due to

Iocational factors. These states have been excluded as outliers.

The price of natural gas in the Commonwealth is among the highest in the United

States. In fact, it is over 20% higher than both the average and median prices throughout

the Nation as a whole. The Commonwealth's interest in furnace efficiency is greater than

that in the Nation as a whole given the price its residents face for an essential commodity.

C. The Energy Burden on Commonwealth Residents is Higher Than

That Prevailing for the Nation Generally.

Energy burden is an indicator that includes the amount of energy consumption

required for a household to achieve a certain end, such as a healthy indoor temperature,

as well as the cost ofthe resources to achieve that end, or fuel cost, relative to that

household's income. Low income households by definition have higher energy burdens

than higher income households in a particular state or region and are particularly

sensitive to the detrimental effects of a high energy burden. They are forced to make

choices between essentials, such as food, medicine, and heat that are not necessary for

non-low income households.

To begin providing a picture of energy burdens on low-income households in the

Commonwealth, the chart below (Figure 4) shows the average total energy cost

(heating/cooking/lighting/miscellaneolls costs) oflow income households in the

Commonwealth, which is among the highest in the Nation. 6

6Source: http://www.liheap.org/databook02/ accessed 1/26/09

- 4-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Figure 4 - Average Energy Cost - Low Income Households

L1HEAP Eligible Households Average Annual Energy Cost by State· 2002

$2,400

$2,200 •

• • $2,000

... A .. .••• $1,800 ..." .

$1,600 • • •• • • • • • • • $1,400 .... .. .. .... • • • • • • • • • • • • • $1,200 •• • $1.000 ,

0° ~~ .$' ~o «v *-C:J ~~ 0~ 0<:> 0'?- $ ~0 o*- ~C:J ~'?- «'?- ,,+ (} <:>~ -fThat the most economically vulnerable households in Massachusetts face one ofthe

highest energy costs in the Nation is another component ofthe Commonwealth's

compelling need for the proposed 90% AFUE NWGF standard. The Low Income Home

Energy Assistance Program ("LIHEApII

) Databook (see fn. 5) shows that the energy

burden for all Commonwealth households is 7% of household income, while the energy

burden on those households who receive LIHEAP (fuel assistance) is 19.8%. By

comparison, households in California, our most populous state and one almost at the

middle ofthe chart above, bear a much smaller energy burden of only 4.20/0 statewide,

and the LIHEAP-eligible households in California bear an energy burden of only 12.7%.

Another way to understand the energy burden on low-income households is

through "affordability gap" data. The firm ofFisher Sheehan Colton ("FSC") has been

calculating the household energy affordability gap (the "Gap") since 2003. 7 8 The Gap

captures the difference between a supportable level of expenditure of household income

for energy and the required level of expenditure for low-income households. While

specific to low-income households, the Gap also represents the relative cost of energy in

each state for all households. It incorporates state-specific factors (e.g., income, fuel cost

and fuel requirements) that span economic sectors. The chart below (Figure 5) shows

that the Commonwealth has one ofthe largest Gaps in the Nation and that this Gap has

. 9 gotten worse over tIme.

7 Fisher Sheehan & Colton (http://www.fsconline.coml) is a well-recognized public finance and economics

firm that has developed a specialty area in the quantification ofthe gap between affordable home energy

bills and actual home energy bills.

8 http://www.homeenergyaffordabilitygap.comJO1_WhatIsHEAG2.html

9 Average dollar amount by which actual home energy bills exceeded affordable home energy bills for

households below 185% ofpoverty. .

- 5 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Figure 5 - Affordability Gap

$3,500

US Low Income Household Energy Affordability Gap 2002 &. 2007

•

$3,000 - .. ....

1. 20021 .. $2 1 500 /- 20071

$2,000 ••• 111

fl8 1111111111 II l1l'i II1II III

$1 1 500 _lIIII l1li 1IlI- Mil 1IlIIIIIII!lIIIIlll!lllllllllll·"- 1IlII1Il1llll1II'I _ ... l11li111 II1II IIlIII III ...... ;to. ...... $1,000 ........ .. ~~

,..~.., ... •• 111~ .... ~~~.., ~~A"~ $500 A A. ..... ~~~~

4) • v ... .. ,. .. .,. .. ...,

$0

0'" 0'" ,s' .o'?l 00 . v

o ",'?I e,ro "'~ -:0" ,J..I .i''b ;t't> ~'b. of .~C>.> ~'() .~'() ~;f;."'" ~p ~"'o +'?Ic, 'b",o ~ro .",<oro 0<::-'<-- c 'b ,.p .~ 4' ''b ~Il} .~~ .~t:; 6,0 0<' ~e, ro ":>..c;j 'b .s.,<..(5) ':f§'b ~'?).;y ~o<$' "!::,rot:; ~,<.~ x-"li 4>0<::- ~'\! "'0 ",q. '.;,..'?>~ ~l' tb<$' a ,(} ...<::- ,::; '?It:; 0 ro~ ",e,<::' vO ~q; ~~ ~~ ~'O oro <:>e; ~<$' ~ro'3 ~(j ~~

~e;

FSC has detennined that an affordable energy burden for low income households

is 6% of annual income. The table below (Figure 6) shows the burden of energy costs on

Massachusetts low-income households. tO

19ure 6 M- assachusetts Energy B d ur en

Massachusetts Low Income Energy Burden - 2007

Poverty Level (Income as % of # Households

Home Energy Burden (%of

Federal Poverty Level) annual income)

Below 50% 109,900 87.30%

50 -74% 53,248 35.30%

75 -99% 67,654 25.300/0

100-124% 72,499 19.70%

125-149% 75,882 16.20%

150-185% 109,259 13.30%

Total HHlWeighted Avg 488,442 35.41%

F'

10 Source:

http://www.homeenergyaffordabilitvgap.comldownloads/2007 Released Apr08/StateslMassachusetts.pdf

accessed 3/9/09. In reality, extremely low-income households do not spend 87.3% oftheir income on

home energy, but instead face termination of utility service and living without space heat because they

cannot afford their energy bills.

- 6-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
The amount of heating required, the price offuel, and the income level of

Commonwealth residents combine to increase the Commonwealth's motivation to

maximize the use of high efficiency heating equipment.

D. Natural Gas Use for Residential Heating Has an Impact on Other

Markets.

Residential heating customers in Massachusetts account for only a portion ofthe

natural gas load. The demand ofresidential heating customers somewhat competes with

the demand ofnatural-gas fired electric power plants. This does not mean that residential

customers-have to make a decision between keeping wann and keeping the lights on,

because regulatory and operational structures strive to assure that their energy needs for

both heat and light are met. It does mean, however, that inefficient consumption of

natural gas in home furnaces needlessly increases overall demand and thus raises prices

for all users. Moreover, electric generating units on the natural gas system have a lower

priority than residential heating customers, "accounting for the likelihood that gas-fired

generators' contracts for natural gas transportation could be interrupted during the winter

months.,,11 This competition for the resource can affect both the cost ofnatural gas and

the societal and individual value of natural gas savings.

In a 2005 report to the New England Governors' Conference that was focused

primarily on electric generation, the first finding made was: ·'The concern for the

reliability of natural gas supplies arises almost exclusively in the winter months when

demand for this fuel for space heating increases dramatically and is coincident with

demand from gas-fired electric generation.,,12 For more than a decade, the expansion of

electric generating capacity in New England and adjacent regions has been natural gasfired, as shown below in Figure 7. 13

11 O'Connor, David L. et a1. Meeting New England's Future Natural Gas Demands: Nine Scenarios and

Their Impacts. Boston, 2005. New England Governor's Conference. Page vii..

12 Op.Cit. Page 69

13 Source: http://www.eia.doe.gov/emeu/states/sep use/notes/use print2006.pdf, accessed 3/17/09

- 7 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Figure 7 - Natural Gas for Generation in Massachusetts

Natural Gas Consumption by Electric Generation in Massachusetts

170 ~--------------

160 -1--------------

4) 150 +--------------- <l>

u.. 140 -1--------------- t)

:g 130 +-----------

u 120 +----------- c 110 +-----------

100 +-----------

90 +------=-----

80 -t-,----'-------,--

2000 2001 2002 2003

Year

2004 2005 2006

The Independent System Operator-New England, responsible for regional

transmission and reliability, noted in 2008 that the "region's heavy reliance on natural gas

as the dominant generator fuel type has left the region vulnerable to fuel-supply risks,

which can have an adverse impact on system reliability and lead to volatile and high

electric energy costs associated with variations in natural gas prices.,,14 Fuel savings in

the residential heating sector have a direct and tangible impact on the electric generation

sector. The Commonwealth's disproportionate reliance on natural gas for electric

generation and for home heating creates an unusual and compelling interest compared to

the prevailing conditions in the rest ofthe Nation for a higher standard offumace

efficiency.

E. The Residential Heating Equipment Market is Difficult to Influence,

Particularly for Rental Housing.

The Commonwealth's rate ofrental housing creates another unusual and

compelling interest when compared to conditions prevailing in the United States

generally. Efficiency efforts in the rental housing market experience a phenomenon

known as "split incentives." Building owners are typically responsible for the capital

costs ofthe heating equipment and building envelope, while building occupants are

typically responsible for ongoing operation costs, which is primarily fuel. In the

narrowest sense, a building owner's interest is in reducing first cost, that is, putting in the

least expensive equipment and envelope. Occupant interest is focused on reducing

operation cost, but a tenant typically has neither the authority nor the resources to make

the capital investment necessary to achieve this.

The Commonwealth has one ofthe higher rental housing rates in the country,

which makes it significantly more challenging to influence purchasing decisions through

means other than standards. The chart below (Figure 8) shows the range ofrental

14 ISO-NE Staff. 2008 Regional System Plan. Holyoke MA, 2008. Independent System Operator-New

England. Page 3.

- 8 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
housing rates in the United States and highlights the Commonwealth's position in this

range. I5

Figure 8 - Rental Housing Rates - US

US Rental Housing Rates 2008

45% _

I • 40% •

• • MA 35% . ..... --_. • • • • • • 30% ..-- •••••••••• •• • • • • • • • 25% •• II II

II II •• II

• 20%

15%

~J.. $" ~'?- *-e;, 0'?- ~<c ~v ~~ ~Q cP XV ~'?- 0-<- Q.'?- ,'?- ~0 e;,0 §

Subsequent sections ofthis report and analysis describe the Commonwealth's

efforts to increase the penetration ofNWGF with an efficiency rating higher than the

federal standard. These efforts have achieved relatively high penetration of high

efficiency units in the overall Massachusetts market, but the rental housing sector likely

represents a relatively larger share ofthe untapped potential energy savings, compared to

owner-occupied housing. Because it is very hard to influence buying behavior in the

rental market other than by state regulation, and the Commonwealth has an unusually

high rate ofrental housing, the Commonwealth has a compelling state interest in

implementing a higher standard for NWGF than prevails in the rest ofthe Nation.

F. Regulatory and Statutory Requirements.

As mentioned above, M.G.L. c. 25B, § 5, and its implementing regulation set forth at

225 C.M.R. 9.03, require that to be eligible for sale in the Commonwealth, NWGF must

meet or exceed an AFUE of 90 percent. The statute and regulation are complemented by

other Commonwealth laws, which are more fully described the Massachusetts State

Energy Plan submitted with the Petition for Waiver). The listed statutes and their

implementing regulations constitute the Commonwealth's current energy plan. Some of

these statutes and salient features are:

• the Green Communities Act, which sets aggressive energy use reduction

targets for the state.

15 http://www.census.gov/hhes/www/housinglhvs/rates/index.html- accessed 1/30/06. DC excluded.

- 9-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
• the Global Wanning Solutions Act, which requires reduction of

greenhouse gas emissions in 2050 to at least 80% below 1990 levels.

• the Regional Greenhouse Gas Initiative, which is intended to reduce

greenhouse gas emissions through a binding, regional cap and trade

mechanism.

G. Summary

Optimal has concluded that conditions and circumstances in the Commonwealth

differ substantially from those prevailing across the Nation. These circumstances include

a greater need for heating due to the Commonwealth's climate, higher unit costs for

heating fuel, the more substantial impact ofthe total energy bill on vulnerable

households, the impacts ofthe heating market on the electric generation sector, the larger

proportion ofthe market in rental housing that makes it harder to reach due to split

incentives, and specific but as yet unmet objectives that are manifested in the

Commonwealth's statutes, regulations, and energy plans. Taken together, all ofthese

factors amply demonstrate that the Commonwealth has a compelling need to implement

its new high-efficiency standard for NWGF.

III. Implementation ofthe Massachusetts Standard Will Not Adversely Affect

the Furnace Market.

Optimal undertook primary and secondary research to evaluate the impact of a

higher standard for NWGF in the Commonwealth on the full range of participants in this

equipment market. We concluded, as shown in the sections below, that:

• Burdens on manufacturers offurnaces complying with the Massachusetts

standard will be minimal, because these manufacturers already produce

and sell products that would meet the Massachusetts standard, and this

equipment already has a high penetration level in the Commonwealth;

• Aside from efficiency, there is no significant difference in consumer

desired features between equipment that meets the current federal 80%

AFUE standard and equipment that would meet the proposed

Massachusetts standard of 900/0 AFUE; and,

• There would be no difference in the impact ofthe high efficiency standard

between small and large manufacturers, or between manufacturers within

or outside the Commonwealth.

- 10-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
A. Manufacturers Already Produce and Sell Products That Would Meet

the Commonwealth's Proposed Standard.

1. The National Market Overview Shows Increasing National Shipments

of High Efficiency Furnaces.

Non-weatherized gas furnaces that would meet the proposed Massachusetts

standard have been manufactured and distributed widely for over a decade. Below (in

Figure 9) is a snapshot ofthe furnace market between 1995 and 2003.

Figure 9 - National Shipments

USANVVGF Shipments by Efficiency

II Proposed MA Standard

BUS Standard 1-------------------------,

o

3500000

1000000

2000000

2500000

3000000+-------------==---

500000

1500000

1995 1996 1997 1998 1999 2000 2001 2002 2003

This data, provided in 2005 to DOE by the Gas Appliance Manufacturer's

Association ("GAMA"), a predecessor organization to the Air-Conditioning, Heating, and

Refrigeration Institute ("AHRI"), and divided by furnace efficiencies above and below

880/0, does not correlate directly to the difference between the national standard of 80%

AFUE and the Commonwealth's proposed standard of 90% AFUE. 16 However, the same

source states that units with efficiencies that fell between the national standard of 80%

AFUE and the proposed standard of 900/0 AFUE account for only 4% ofthe shipped units

in 2003. 17 This is shown in the following chart (Figure 10):

16 EE-RM/STD-OI-350 Comment 96 & 98, referenced as "GAMA Comment"

17 In the current market, the only furnaces that attain efficiencies greater than 85% AFUE use condensing

technology, which invariably leads to efficiencies over 90% AFUE.

- 11 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Figure 10 - Distribution of Efficiencyl8

Distribution of Shipped Unit Efficiency· 2003

Il 80% or less

II Between 81 and 88%

090%

091%

D 092%

1m 93 to 96%

The national data for 2003 show that there are very few products sold in the gap

between the national 80% standard and the Commonwealth's proposed standard of 90%,

and furthermore that "the overwhelming majority offurnace shipments within the range

of 78% to <90% AFUE fall into the 80% to <81 % bin." This data also shows that almost

90 percent ofthe furnaces shipped that exceeded the 80% federal standard (28% of all

furnaces shipped) also exceeded the Commonwealth's proposed standard of 90% AFUE.

These data show that furnaces able to meet the proposed standard have been

available and broadly distributed for over a decade. Hence, the Commonwealth's

proposed standard would not have required manufacturers to redesign their products,

their manufacturing processes, or their distribution operations.

The Commonwealth has been unable to acquire a comparable data series for

subsequent years. 19 We present below, in Section III.A.2., the data that we were able to

acquire to update the data series.

1& GAMA Data

19 Although MassDOER specifically requested from AHRI in October of2008 comparable data on

shipments of non-weatherized natural gas furnaces nationally and in Massachusetts, AHRI declined to

provide the information on grounds that it was confidential and proprietary. On March 27,2009,

MassDOER and the Massachusetts Attorney General requested in writing that DOE obtain and supply to

the Commonwealth certain comparable and more current information. By letter dated June 23,2009, DOE

responded that some data sought was already publicly available from DOE's rulemaking docket for

residential furnaces and boilers, and also provided hard copies ofsome ofthe data to the Commonwealth.

- 12 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
2. Federal ENERGY STAR Program Data Confirms That High

Efficiency Furnaces Are Readily Available.

The United States Environmental Protection Agency ("EPA") developed an

ENERGY STAR program for furnaces and began tracking shipments in 2004?O The

table below (Figure 11) shows the publically available data.

21 Igure II - ENERGY STAR Sh·Ipments

US EPA ENERGY STAR Shipment Data

2004 2005 2006 2007

Response Rate 96% 96% 96% 100%

# ofPartners 23 24 24 26

ENERGY STAR Units Shipped 1,661,000 1,319,905 1,167,112 1,030,976

Total Units Shipped (Calculated) 3,534,043 3,567,311 3,334,606 3,221,800

ENERGY STAR Market Share 47% 370/0 350/0 32%

F'

The ENERGY STAR AFUE standard for NWGF is 90% or better, the same level

that the Commonwealth seeks to make its operative efficiency standard. The GAMA

data set forth above uses a threshold of 88% AFUE to define high efficiency.

Considering the relative lack ofunits on the market between the current 80% AFUE

federal standard and the ENERGY STAR 90% AFUE threshold -- only 4% -- the

segmentation ofthe units shipped, as reported by GAMA, is for all intents and purposes

equal to the segmentation used by the EPA.

There currently are over 50 brands offering over 350 model series with

efficiencies at 90% AFUE or better listed by the EPA.22 According to the ARRI publicly

available database, there are 13,446 distinct models rated below 90% AFUE and 4,890

models rated at or above 90% AFUE.23 The AHRI data indicates that approximately

27% of all models available would already meet the proposed Massachusetts standard of

90%AFUE.

The table below (Figure 12) displays a data series for national sales offurnaces

segmented into two categories: those that meet the current 80% AFUE federal standard,

and those that would already meet the proposed Massachusetts standard of 90% AFUE.

20 From http://www.energystar.goY/index.c:fm?c=partners.unit_shipment_data_archives and

http://www.energystar.goylindex.c:fm?c=partners.unit_shipment_data; accessed 12/11/08

21 "Response Rate" refers to the percentage ofENERGY STAR partners. The "Total Units" calculation is

ENERGY STAR Units Shipped divided by ENERGY STAR Market Share.

22 http://www.energystar.gOYlia/products/prod_listslgas_furnaces-prod_list.xls: accessed 121II108

23 http://re.gamanet.org:80801gama_cafslsdpsearch/search.jsp?table=Furnace: accessed I114/08, search

criteria "Natural gas or propane" and AFUE below 90 & at 90 or better.

- 13 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
F·19ure 12 T' S' D t 24 - lme erIes aa

National Shipments ofNWGF by Federal and Proposed MA Standard Over Time

(1,000 units) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

US Standard 2,020 2,196 2,071 2,283 2,398 2,404 2,209 2,311 2,240 1,873 2,247 2,167 2,191

Proposed MA Standard 581 675 702 688 729 733 854 890 1,024 1,661 1,320 1,167 1,031

Total Furnace Sales 2,601 2,871 2,773 2,972 3,126 3,137 3,063 3,201 3,264 3,534 3,567 3,335 3,222

%!vfeeting MA Standard 22% 24% 25% 23% 23% 23% 28% 28% 31% 47% 37% 35% 32%

Housing Starts 1,354 1,477 1,474 1,617 1,641 1,569 1,603 1,705 1,848 1,956 2,068 1,801 1,355

The data in this section support the following conclusions on both the national

level and for the Commonwealth in particular:

• A significant portion offurnaces on the market meet the proposed

standard, and have met that standard for over a decade.

• The proposed standard will not impose a burden on the supply chain, since

it is already providing this equipment.

• The proposed standard of 90% AFUE will have no, or at most a trivial,

impact on the market segment between it and the 800/0 AFUE federal

standard. Only 4% of all products sold in 2003, the last year for which

data are available, had AFUE ratings between 81% and 88%. There is no

evidence that this market segment has expanded in the intervening years.

GAMA's cover letter for a 2002 data submission summarizes this key

point in the following manner: "Notice the success of condensing

furnaces in colder climates, the almost total absence of gas furnace

shipments between 80% and 90% AFUE. ,,25

ENERGY STAR is a joint program ofthe EPA and DOE. As such, it is a credible

and reliable source of data. In the absence of actual shipment or sales data for recent

years, the Commonwealth offers the results from the ENERGY STAR program as

supporting evidence that there will be no adverse impact on manufacturers or distributors

from the proposed Massachusetts standard.

B. A Massachusetts Market Overview Shows a Steady Increase in High

Efficiency Unit Sales in the Commonwealth, Approaching a Limit via

Voluntary Programs.

1. Available Historic Data Confirms an Upward Trend in Sales.

The market in the Commonwealth for high efficiency NWGF is substantially

different from the national market. The penetration ofthis equipment in the

24 Sources: GAMA Data & EnergyStar data

25 Gas Appliance Manufacturers Association, April10, 2002, letter to Mr. Cyrus Nasseri re Docket No. EERM/STD-O1-350

- 14-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Commonwealth is substantially higher than that which prevails in the Nation as a whole,

and the penetration ofthese units appears to be reaching a plateau, as shown in Figure 13

below.

Figure 13 - High Efficiency Shipments26

Share of furnaces 88% AFUE or Better

80% --;------------------------------------_

70% +------1

60% +------------------=-IIJle=::---~----------------_____1

50% +-------------~---------------------------/

20% +------'--'------,------------.----,-----,-------.---------.----,--------,---------...,----,-----_____1

30% +-------------------------=-------==--=~",.."".--------I

40% +---------:o;o~------------------------______..fC----~.__________j

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

This data shows that:

• High efficiency furnaces captured a bigger market share in Massachusetts

than in the rest ofthe Nation, on the order oftwo to one, in the years

preceding the ENERGY STAR initiative for this equipment;

• After the inception ofthe ENERGY STAR program, the Commonwealth

still showed significantly higher penetration of high efficiency equipment

than the rest ofthe Nation; and,

• The efficient furnace shipment curve in Massachusetts is comparable to

the classic market diffusion curve. It climbs relatively sharply in the early

years and then plateaus over a period oftime. By comparison, the national

curve appears relatively flat until the first year of a national promotion

effort and then falls sharply afterwards.

High efficiency units have made up more than 60 percent of all shipments to

Massachusetts since 2000 and are a unique feature ofthe Commonwealth's market.

Subsequent sections ofthis report address some ofthe causal components ofthe

increase in sales of high efficiency units. The key point ofthis section is that the

26 Massachusetts data supplied by GAMA to Keyspan; USA data from "GAMA Letter" and EnergyStar

data.

- 15 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Massachusetts market differs substantially from that ofthe Nation as a whole, and for this

reason requires different approaches.

2. The Market for High Efficiency Furnaces in New and Existing Homes

is Substantial.

Optimal's research on market impacts ofthe proposed Massachusetts standard

reflects that the market is already providing this equipment and that it can meet the

requirements ofthe 90% AFUE standard. This section ofthe analysis quantifies the

potential market in the Commonwealth for efficient furnaces. It provides the context for

estimating net benefits ofthe proposed standard, as well as the impact ofthe standard on

the total market.

As with any kind of capital equipment, total sales offurnaces are measured by

looking at two primary components: new purchases and the purchases ofreplacements

for existing equipment. The replacement market correlates to the size ofthe existing

housing market. Publicly available information from the United States Census Bureau

and DOE are used in this analysis to estimate both the replacement market and the new

construction market in the Commonwealth.

a) Estimate ofthe Size ofthe Replacement Market.

The United States Census Bureau reports that between 2000 and 2007, the

percentage ofCommonwealth households that used utility gas for heating rose from

43.9% to 46.6%.27 Gas is currently the heating fuel for approximately 1.2 million

households, but this does not correlate to the market for residential furnaces. Many of

these Commonwealth households are in buildings heated by equipment larger than that

covered by the current federal 80% AFUE standard or the proposed Massachusetts 90%

AFUE standard. These households are in multiple unit buildings that have commercialsized heating plants. The distribution of households by building unit size is shown below

in Figure 14.

27 http://factfinder.census.gov: accessed 12/13/08

- 16-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Figure 14 - Housing Unit Size Distribution

Massachusetts Housing Unit Size Distribution

Duplex

22%

Single Family

57%

According to the ElA's 2005 Residential Energy Consumption Survey ('tRECS"),

there were 44.7 million natural gas central warm-air furnaces in United States housing, of

which 0.8 million were in the New England Census region?8 ElA's RECS also reported

that gas was the heating fuel for steam or hot-water systems in approximately 8.2 million

households nationally, including 1.3 million in New England.

Another factor necessary to determine the replacement market is the portion of

existing equipment that would fail and be replaced by comparable equipment in a given

year. A commonly accepted methodology for estimating this replacement market is

based on the average lifetime ofthe equipment under discussion. Analyses commonly

assume that the annual replacement is equal to one, divided by the equipment lifetime in

years. Many efficiency programs set the lifetime ofnatural gas furnaces at 20 years.

However, much ofthe equipment still in service is significantly older than 20 years, and

the RECS reports that approximately 21% of heating equipment has been in service for

20 years longer.

The following tables (Figures 15 & 16) show estimates ofthe natural replacement

market for NWGF. The first table is based on the assumption that the equipment under

consideration is only applicable to single family residences. The second table includes

duplex residences. Both tables show the market assuming 20-year and 25-year lifetimes.

28 http://www.eia.doe.gov/emeu/recs/recs2005/hc2005_tables/hc4spaceheating/excel/tablehc 11.4.xls:

accessed 12/12/08

- 17 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
F'Igure 15 - S'mg:eI Famuy'1 R I ep acemen ar e

Estimation ofMassachusetts Annual Furnace Replacement Market - Single Family Homes

Year 2000 2001 2002 2003 2004 2005 2006 2007

Total Housing Units 2,625,040 2,637,393 2,648,959 2,660,758 2,675,383 2,692,235 2,709,365 2,722,190

Factor '.,\"'. ' ...... ".> .•......,. : ...... i . .' ...• , <•....• \. , .\' •...

Homes 57% 1,505,869 1,512,955 1,519,590 1,526,358 1,534,748 1,544,415 1,554,242 1,561,599

% Heated by Gas 47% 702,260 705,564 708,659 711,815 715,728 720,236 724,819 728,250

% ofGas Furnaces 38% 267,528 268,786 269,965 271,168 272,658 274,376 276,121 277,428

Natural Replacement

Market (20 yr life) 5% 13,376 13,439 13,498 13,558 13,633 13,719 13,806 13,871

Natural Replacement

Market (25 yr ]ife) 4% 10,701 10,751 10,799 10,847 10,906 10,975 11,045 11,097

Igure 16 -S'mgleI Famuyan '1 dDupJex 1 R I eplacementMarket

Estimation of Massachusetts Annual Furnace Replacement Market - Single Family Homes & Duplex

Year 2000 2001 2002 2003 2004 2005 2006 2007

Total Housing Units 2,625,040 2,637,393 2,648,959 2,660,758 2,675,383 2,692,235 2,709,365 2,722,190

Factor ,', .. .... .•. .> ........ '. '.:\'. . .......•...........• <'" ..•.. , ......•..••...••..•. .".•...... > '.' ......>. ,.

Homes 79% 2,082,073 2,091,871 2,101,044 2,110,403 2)22,003 2,135,369 2,148,956 2,159,128

% Heated by Gas 47% 970,972 975,541 979,819 984,184 989,593 995,827 1,002,163 1,006,907

% ofGas Furnaces 38% 369,894 371,635 373,264 374,927 376,988 379,362 381,776 383,583

Natural Replacement

Market (20 yr life) 5% 18,495 18,582 18,663 18,746 18,849 18,968 19,089 19,179

Natural Replacement

Market (25 yr life) 4% 14,796 ]4,865 14,931 14,997 15,080 15,174 15,271 15,343

F'

The analysis indicates a replacement market ranging between roughly 10,000 and

19,000 units annually for the years after the data provided by GAMA in 2005. The next

phase ofthe analysis addresses new construction.

b) Estimate ofthe Size ofthe New Construction Market.

Data from the United States Census shows that the pattern ofnew home

construction in the Commonwealth roughly parallels the national pattern.30 A correlation

between the number ofhousing starts and furnace sales is shown in the chart below

(Figure17), comparing housing starts from the United States Census Bureau's database,

to the total units shipped.31

29 Data for this and subsequent chart is derived from the US Census bureau data and RECS data. The 38%

offurnaces is the furnace portion ofgas equipment in the New England census region.

30 http://factfinder.census.gov: accessed 12/13/08

31 http://www.census.gov/const/startsan.pdf: accessed 12/11/08

- 18 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Figure 17 - Shipments to Housing Starts (National)

Housing Starts to Total Furnace Sales

3,700,-------------------------------------,- 2,200

3,500 +----------------------------..~~------'~-----+2,000

3,300+------------------------,.F-.,F------ .......---+ 1,800 j

w

C

3,100 1,600 o 0

x .... 0

2,900 hiiiiiii;ii.,,;=--~:----'--------r==========;_-----ltiiill1,400..... g .......Total Furnace Sales

- Housing Starts

2,700 +-------,~--------------"====~====='----------+1,200

2,500 +--------,---------.---..,....-------,-------.---.,---------,-------.---.,...-----,-----------.----.,...----+ 1,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Figure 18 below shows new housing units in the Commonwealth by year:

Figure 18 - Massachusetts New Housing

Massachusetts - New Housing Units

18,000 ,-----------------------------------------,

14,000 +-----------------iI''----------------~---_l

11,000 +--------..,----------.....----------...,-------------r-------.-----------,---------~

13,000 +--------------------,j_--------------------i

12,000 +-------==-=---=-------------t

15,000 +-------------------~'----------------~-------l

I....... New Housing Units I

16,000 +--~=============:::::--.-------_______.;!':_------~-----_J

17,000 +-------------------------1

2001 2002 2003 2004 2005 2006 2007

The table below (Figure 19) develops an estimate ofthe new construction market

based on an analytic method similar to that applied to the replacement market. It assumes

that the new construction market is segmented in the same ratios as the existing housing

market for the following factors:

• Portion ofsingle family and duplex residences

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
• Portion ofnatural gas heating

• Portion of natural gas furnaces to water-based systems

These assumptions are a rough approximation ofthe market. Optimal believes

this approximation is conservative, or low, for two reasons. First, there has been an

upward trend in the use ofnatural gas as a heating source. Second, there has been an

upward trend in the installation of central air conditioning in residential new construction.

Taken together, these two trends increase the probability that the heating system will be a

furnace, which can use the same distribution system as the air conditioning, as contrasted

with a hydronic system that requires a separate water distribution system.

Igure - sirna eo ew ODS rue IOn ar e

Estimation ofMassachusetts New Construction with NWGF Installation

2001 2002 2003 2004 2005 2006 2007

Total New Housing Units 12,353 11,566 11,799 14,625 16,852 17,130 12,825

Factor .' ,"" ), "".,,,' " ", '.'....,,,", ',">" . ',.'./,,<,,;',,'.' ",,: .... '<)':'.. ·····i .:'/:,:,

Single Family 57% 7,086 6,635 6,769 8,390 9,667 9,827 7,357

% Heated by Gas 47% 3,305 3,094 3,157 3,913 4,508 4,583 3,431

% of Gas Furnaces 38% 1,259 1,179 1,202 1,490 1,7] 7 1,746 1,307

:"<".':.'.\ >,"',,' ...•', :.','<', '< ,'.}' .,' ','.'" ." .... '.:, ,,:' , .. ,.... ':,'. "', .. " ;', ....., .,,;/'. ,:;, " ,.",...,<,,' ',',':'.>, ·/y'i.··",',,\(..<

1 & 2 Family 79% 9,798 9)74 9,358 11,600 13,366 13,587 10,172

% Heated by Gas 47% 4,569 4,278 4,364 5,410 6,233 6,336 4,744

% ofGas Furnaces 38% 1,741 1,630 ],663 2,061 2,375 2,414 1,807

F' ] 9 Eft f MA NWGFNet f M k t

This analysis has developed estimates ranging between approximately 12,000 and

22,000 units for the period between 2001 and 2007. The GAMA data show below

(Figure 20) reported shipments of all furnaces to the Commonwealth ranging between

roughly 14,000 and 22,000 units for the years between 1995 and 2003, The historical

data validates the range of unit shipment developed by this analysis.

F'Igure 20 - GAMA Ver1'ftIed NWGF Sh'Iprnents

Massachusetts NWGF Shipment Data

AFUE 1995 1996 1997 1998 1999 2000 2001 2002 2003

<88% (units) 9,362 9,736 7,843 9,269 8,803 8,725 8,335 8,954 10,241

Over 88% (units) 4,836 7,307 6,759 8,218 11,792 14,254 15,715 17,615 21,812

Over 88% (%) 34% 43% 46% 47% 57% 62% 65% 66% 68%

3. Massachusetts Market Summary.

The preceding analysis ofthe Commonwealth for NWGF equipment shows that:

• The penetration of high efficiency units is higher in the Commonwealth

than that which prevails in the rest ofthe Nation.

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
• The distribution and installation infrastructure for high efficiency

equipment already exists.

• The estimates ofthe total market size prepared in this analysis are

consistent with existing data sources and serve as a credible basis for

determining the impact ofthe Massachusetts standard.

C. Other Market Impacts of the Proposed Massachusetts Standard.

L The Availability of Consumer-desired Features Will Not Be Adversely

Effected by the Massachusetts Standard.

The proposed Massachusetts standard for NWGF will not reduce the availability

of consumer-desired features. From the consumer perspective, furnaces are fungible.

They are typically sold by contractors and service organizations with features like

reliability and efficiency highlighted. The high efficiency units offer all ofthe features

available in lower efficiency units, and in some cases may be bundled with features that

offer enhanced value, such as differential temperature controls. These controls optimize

the operation ofthe heating system by comparing the internal, external, and desired set

point temperatures and by modifying the operation cycle to increase comfort and reduce

fuel usage.

32

2. Consumers Derive a Strong Net Benefit From the Application of a

More Stringent Furnace Efficiency Standard.

DOE's Technical Support Document in Docket Number EE-RM/STD-Ol-350

evaluated the impacts of a variety ofTrial Standard Levels ("TSL") and design option

levels. The current 80% AFUE federal standard is equivalent to TSL #A. The

Massachusetts proposed standard of90% AFUE is equivalent to TSL #B for NWGF.

The table below (Figure 21) is a summary from DOE's environmental analysis.33 DOE

found that "the TSL projected to yield the maximum consumer NPV [net present value]

at seven percent discount rate for the cold climates (e.i., ~5,OOO heating degree days and

~6,000 heating degree days),,34 included NWGF standards at 90%.

32 See, for example, www.fumacecompare.com: "The Lennox G61 V is a variable-speed gas furnace with

enhanced humidity controls that operates at multiple speeds to regulate the air flow throughout the home. A

SureLight® control board ensures easy and efficient functioning of all systems. This furnace is Energy Star

rated with an AFUE from 94.6 to 95%. It is a two-stage heater that provides two levels ofheating for

temperature control. The design ofthe Lennox G61 V Furnace is CSA certified and has obtained the Good

Housekeeping Seal."

33 USDOE, Technical Support Document: Energy Efficiency Program For Consumer Products: Energy

Conservation Standardsfor Residential Furnaces and Boilers, September 2007 available at

http://wwwl.eere.energy.govlbuildings/appliance_standards/residential/tb_tsd_0907.html 34 72 Fed. Reg. 65151

- 21 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
F'Igure 21 - DOE Summary

DOETSD Results Summary

No- TSL Source Action A- Adopted ... '/8 .~ '.MA;. Proposed* '. '.

Cumulative Energy Saved - All Equipment (1) NA 0.25 ·.},2}· .... .'

:-. .... Table 10.4.3

Cumulative Energy Saved - NWGF NA 0.01 '. ..•........ . ..•2.99 :\. ." Table 10.4.3

Cumulative NPV at 7% Discount NWGF (2) NA $40 .... ,. .$12p···· '. \, Table 10.4.5

Cumulative NPV at 3% Discount NWGF NA $120 .....

. $8;200: .'. Table 10.4.6

Cumulative Emissions Reductions - All Equipment

C02 (Mt) NA 7.8 . \.' . . . "137.1.· .... Table EA.16

U NOx (kt) NA 9.2 .....

·.·'164~.6 .:. '. Table EA.16

S .. Cumulative Emissions Reductions - NWGF A C02 (Mt) NA 0.2 94.2 Calculated (3)

NOx (kt) NA 0.3 111.5 Calculated

Socioeconomic Impacts - NWGF (4)

All Consumers NA $2 \i "$55 .' Table EA.22 .""

Low-income Sub-Group NA $2 (" ··.... ·$39.,· • Table EA.22

Senior Sub-Group NA $2 <' ..... $36· .'.....•...:<' Table EA.22

Cumulative Energy Saved NWGF(Quads) 0.01 \.' ... ( ,'.' "'\'1,45\ ....-:' . Table 10.5.2.

N Cumulative NPV at 7% Discount NWGF NA $30 I'." ..... : .•..•.. .'.... $1240· ,...... ..':,\:. Table 10.5.4

0 Cumulative NPV at 3% Discount NWGF NA $90 1< '-,'\', $6,350' ...... Table 10.5.4

R Cumulative Emissions Reductions - NWGF

T C02 (Mt) NA 0.2 :,..(' .' '.45.7'- .... :.,'. " . .' Calculated (5)

H NOx (kt) NA 0.3 .... ... <., 54:1.. .': ". "" Calculated

Socioeconomic Impacts - NWGF - All Consumers NA $3 ' ..............'............. $212>····'·· Table 11.3.4 (6)

* - TSL Bis the lowest alternative considered that includes the MA proposed standard of 90% AFUE for NWGF

"NORTH" is defined as the cold climate region including with HDD >6,000 which more closely matches the conditions in MA than the the

alternative criteria of HDD>5,000.

N (1) - Cumulative total is quads over a time period starting in 2015 and ending in 2038. The reductions include impacts at power plants (both

0 physical reductions and emissions credits) and at the household level

T 2) - Dollars are million 2006$

E (3) - Calculated based on the ratio of NWGF energy saVings to All Equipment saVings times the ratio of emission per gigajoule for natural gas

to fuel as reported in Appendix W

S 4) - Values based on total costs over lifetime of eauioment

5) - Calculated basd on the ratio of the North reQ ion to the total USA.

(6) - Table 11.3.4 lists equipment by AFUE, not by TSL. Values in this table were selected from the most cost effective option with an AFUE

equivalent to the TSL. The values represent average. life cycle savinQs per household.

The difference between the current 80% federal standard (TSL A) and a standard

for NWGF equivalent to the Massachusetts proposed standard of 90% AFUE (TSL-B) is

significant on a nationalleve1, but the most significant differences are for the northern

states. With the application ofthe high efficiency standard, lifetime energy savings

increase by several orders ofmagnitude, from 0.01 quads to 1.45 quads. The net present

values, depending on discount rate, increase by a factor of at least 70. The net positive

lifetime impacts for the average consumer increases from $3 to $212. The original DOE

analysis did not break out the low-income and senior sub-groups by the northern region.

Considering the immense difference between the savings for all United States consumers

of $55 and the savings for northern consumers, and the significant gain the higher

standard would have had on these subgroups across the Nation (from $2 to $39 or $36), it

- 22-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
seems reasonable that these sub-groups in the Commonwealth would experience a

substantial net positive benefit from the higher efficiency equipment.

In fact, in the New England region, low-income households stand to benefit

disproportionately from a standard that requires installation offurnaces of at least 90%

AFUE. Census data demonstrate that low-income households are disproportionately

renters, not homeowners. (See Section II. E) These low-income renters must rely on the

property owner to replace their heating systems. To the extent newer, higher-efficiency

furnaces are already in place, they are disproportionately represented in single-family

homes and higher-income households. Thus, lower-income tenants tend to live in units

that have older, less efficient furnaces and stand to see the greatest efficiency gains and

reductions in energy bills as those furnaces are replaced with units at 90% AFUE or

higher due to the implementation ofthe Commonwealth's standard.

The Technical Support Document did not estimate the impact of various trial

standard levels on specific states. The Appliance Standards Awareness Project and

ACEEE issued a report in July 2009 that estimated the impact of enhanced federal

standards on a wide range of products and disaggregated the impacts at the state level.

The report estimated that a standard of 90% AFUE for gas furnaces, implemented in

2013 would have the following impact in Massachusetts35 :

• Capture a net present value savings, in 2009 dollars, of$144,000,000 by 2030;

• Save 8.31 million therms ofnatural gas by 2020 and 19.4 million therms by 2030;

and,

• Cut carbon dioxide emissions by 45,000 metric tons by 2020 and 105,100 tons by

2030.

Independent analyses consistently find that the benefits ofthe Commonwealth's proposed

standard overwhelm the cost.

3. Installation, Operation, and Maintenance Procedures Would Not Be

Adversely Affected by the Proposed Massachusetts Standard.

To detennine the impact ofthe proposed standard on the contractor network,

Optimal compiled a database offurnace contractors and vendors in the Commonwealth.

The database was primarily compiled using phone records and internet searches, and was

supplemented by referrals from other market actors. It is possible that a few contractors

and vendors were overlooked, particularly part-time contractors and small vendors.

However, with over 500 contractors and over 150 vendors, we are confident that the

database captures the significant players in this market.

35 http://www.standardsasap.org/stateJ2009%20federal%20analysis/states/fedappl_rna.pdf, accessed

8/17/09

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Optimal and MassDOER administered a qualitative survey instrument to a small

sample of vendors and contractors. The survey's goals were three-fold: to increase

understanding offurnace market conditions in the Commonwealth; to detennine ifthere

are particular concerns about 90% AFUE furnaces in comparison to lower efficiency

furnaces with regard to features, installation, operations, or maintenance; and to

detennine what concerns actors in the supply chain would have about a proposed increase

to a 90% AFUE standard for NWGF. Telephone interviews and survey forms distributed

at regularly scheduled trade ally meetings were used to collect contractor opinions.

The first set of questions attempted to control for our lack of available data on

current furnace sales. The survey tested respondents perceptions ofthe availability of

efficient equipment and the effect on price from an increase to the 90% AFUE standard.

The overwhelming response was that neither availability nor price would be adversely

affected by a 90% AFUE standard.

The next questions checked for issues uniquely associated with the installation

and operation of 900/0 AFUE furnaces that might make them less desirable than lower

efficiency units. Respondents noted that there are certain issues that must be addressed

with the installation of 90% AFUE furnaces, particularly providing drainage for the

condensate produced by the nonna! functioning ofthe furnace. However, the

overwhelming response was that there is nothing unique to 90% AFUE furnaces that

would make them significantly more difficult or expensive to install or maintain. The

reliability and necessary service intervals for higher efficiency equipment were reported

to be comparable to those for equipment just meeting the current 80% AFUE federal

standard. Some respondents noted that replacement components may be less available or

more expensive for the high efficiency equipment, but this was generally attributed to the

relatively small installed base of90% AFUE furnaces compared to 80% and lower AFUE

equipment. As the market share of efficient equipment increases, respondents anticipated

that these differences would decrease.

The last set of questions asked the respondents to estimate the effects of a higher

standard on manufacturers in the Commonwealth and the adjacent states. No vendor was

aware of a manufacturer of gas furnaces in the Commonwealth or the adjacent states that

would be adversely affected by the proposed standard.

D. Implementation ofthe Proposed Massachusetts Standard is Likely to

Foster Other States' Adoption of Similar Standards, Not Disparate

Ones.

In the Final Rule on Energy Conservation Standards for Residential Furnaces and

Boilers issued by DOE on November 19, 2007 (72 Fed. Reg. 65136-65170)~ DOE

recognized the potential benefit that could be achieved through the implementation of

regional standards for residential furnaces and boilers, but detennined that it did not have

the authority under EPCA to establish such regional standards.36 Section 325(0)(6) of

36 72 Fed. Reg. 65151

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
EPCA has since been amended by Congress to empower DOE to establish one additional

regional standard for furnaces ifthe Secretary ofDOE determines that establishing an

additional regional standard will produce significant energy savings in comparison to

establishing only a single national standard, and regional standards are economically

justified.3

? Under the amendment, the Secretary must also consider the impact ofthe

additional regional standards on consumers, llfanufacturers, and other market participants,

including product distributors, dealers, contractors, and installers.

This power to establish an additional regional standard exists side-by-side with

DOE's authority to grant a waiver from federal preemption under § 327(d) of EPCA (42

U.S.C.6297(d)). In fact, § 325(0)(6) provides in relevant part that nothing in t~e

amended statute diminishes the authority of a state to enforce a state regulation for which

a waiver offederal preemption has been granted under 42 U.S.C. 6297(d).

All this said, we have concluded that there is little concern that the

implementation ofthe Massachusetts standard -- after the grant of a waiver from federal

preemption -- would be likely to contribute significantly to a proliferation of State

appliance efficiency requirements. Our research. shows, to the contrary, that ifDOE were

to grant the Commonwealth a waiver from federal preemption, the implementation ofthe

90% AFUE standard would more likely result in a consolidation of State standards. This

is the case because the Commonwealth comprises the bulk ofthe market in New England

for NWGF, and because other New England states that have passed statutory

requirements for furnace efficiency have set them higher than the current federal 80%

standard, at levels that are equal to the Commonwealth's proposed 90% standard. These

Northeast states are Vennont, New Hampshire, Rhode Island and Maryland.38

The following tables (Figures 22 & 23) display Massachusetts shipments as a

portion of national shipments and as a portion ofNew England shipments.39

Igure 22 - Massachusetts Share 0fN' atlOnaISh'Ipmen s

Massachusetts NWGF Shipment as Percent of National

AFUE 1995 1996 1997 1998 1999 2000 2001 2002 2003

MA% of 88%+ 0.83% 1.08% 0.96% 1.19% 1.62% 1.94% 1.84% 1.98% 2.13%

MA%of Total 0.55% 0.59% 0.53% 0.59% 0.66% 0.73% 0.79% 0.83% 0.98%

F'

F'Igure 23 -Massachusetts Share 0fNew E I d ngJan Sh'Ipments

Massachusetts Shipments as Percent ofNew England Shipments

1995 1996 1997 1998 1999 2000 2001 2002 2003

MA as % ofNE (units 88%+) 46% 50% 46% 41% 48% 55% 58% 57% 61%

MA as % ofNE (total units) 49% 51% 48% 44% 43% 47% 53% 54% 57%

37 Pub.L. 110-140, effective December 20, 2007.

38 The standards in Maryland and New Hampshire are applicable to new construction only.

39 The tables are based on data from the previously reference 2002 GAMA submission to DOE.

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
From this evidence we conclude that:

1. Granting the Commonwealth a waiver from federal pre-emption will have

a negligible impact on the national market, since the Commonwealth

comprises such a small share ofthe total market and already has a greater

percentage of high efficiency units sold than the national average.

2. Granting the Commonwealth a waiver from federal pre-emption is likely

to lead to a consolidation ofstandards by state legislatures into a regional

standard appropriate for New England and other northern states with

comparable usage factors. With regard to New England, since the

Commonwealth is roughly halfthe market for NWGF, due to market

efficiency it is likely to become a de facto standard, even if not adopted as

a regional standard. With regard to northern states in other parts ofthe

Nation, granting this waiver could vastly simplify both the analytic and

procedural burdens carrying out the Congressional intent that the

Secretary consider regional standards where appropriate.

In short, we conclude that granting the Commonwealth a waiver from federal preemption will not result in the proliferation of disparate standards and is most likely to

contribute to the adoption of a rational regional standard as permitted by the law.

IV. Given the Relative Costs and Benefits, New Regulation is Preferable to the

Universe of Alternatives.

The Commonwealth has undertaken a comprehensive analysis of non-regulatory

alternatives for achieving the intended benefits ofthe proposed standard (entitled

"Alternatives and Economic Analysis in Support ofthe Commonwealth of

Massachusetts' Petition to Exempt from Federal Preemption Massachusetts' 900/0 Annual

Fuel Utilization Efficiency Standard for Non-Weatherized Gas Furnaces"), which is

being submitted along with the Commonwealth's Petition for waiver (hereinafter, the

"Alternatives Analysisll

). The considered alternatives fall into five basic categories:

A. Consumer rebate programs

B. Low-income grant programs

C. Tax incentives

D. Consumer financing programs

E. Public information and customer education campaigns

The Alternatives Analysis determined the contribution of each category to the total

penetration, as shown in the table below.

- 26-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Igure 24- EsIma t' t ed SuccessRtf aeo AlternafIves

Contribution to Individual Alternative Total Market

Penetration Penetration

Consumer Rebate 55% 37%

Financing Assistance 10% 7%

Low Income Grant 5% 3%

Tax Incentive 16% 11%

Public Education 14% 9%

Total 100% 67%

The Alternatives Analysis then estimated cost and time to achieve the objectives ofthe

Commonwealth's proposed standard, incorporated in the sections below.

The sections below highlight and, in some cases, complement the findings ofthis

report.

A. Consumer Rebate Programs - GasNetworks Program.

Massachusetts has been attempting to capture the savings potential ofmore

efficient gas furnaces since 2002. This program, called GasNetworks, is coordinated

across the gas service territories of multiple utilities in Massachusetts. The program

provided sliding scale rebates for furnaces with 90% AFUE or better. Components ofthe

program include:

• marketing through websites, brochures, bill enclosures, customer call

centers, e-mail, home shows, trade shows, trade ally events, and trade

publications

• training seminars

• rebate application review/approval/processing

• customer inquiry and issue resolution

• onsite equipment installation verification

• management reports/data tracking

GasNetworks is a comprehensive and aggressive rebate program with statewide reach.

The rebates were initially substantial, between $200 and $400 per unit, and

extraordinarily well publicized. In 2004 the program raised the rebate threshold from

90% AFUE to 92% AFUE, which accounts for the drop in rebated units after 2003.

The results ofthis program are summarized in the table below (Figure 25).

- 27-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Figure 25 - GasNetworks Summary

Massachusetts GasNetWorks Rebate Program Summary

Year 2002 2003 2004 2005 2006 2007 2008

(1/1-9/30)

# Rebates 7,931 8,365 6,904 6,414 6,013 5,258 7,107

Budget $2,424,105 $1,015,750 $1,043,810 $1,053,920 $1,248,560 $1,130,805 $1,775,598

% High Efficiency Units Rebated - 59% 60% 47% 44% 42% 39% N/A Lower Bound

% High Efficiency Units Rebated - 75% 76% 60% 56% 54% 49% N/A Upper Bound

The bottom two rows ofthis table are estimates ofthe program participation

measured as a percentage oftotal estimated sales derived from the estimates in Section

III.B. The significance ofthe steady decline in rebate percentages after the

implementation of a higher threshold criterion for rebates cannot be determined absent

actual sales data. It could indicate declining sales of efficient units, declining program

participation as the market adopts the higher efficiency technology, declining sales of

units at all efficiency levels as a result of economic conditions, or some combination of

factors. The spike in participation for the first three quarters of 2008 is likely a response

to high fuel prices and other economic factors.

The American Council for an Energy-Efficient Economy ("ACEEE") has

recognized GasNetworks as an exemplary residential natural gas efficiency program in

200340 and as an exemplary multi-utility collaborative in 200841 . The GasNetworks

program is pushing the boundaries ofwhat can be achieved through market-based

programmatic approaches without substantial increase in effort, cost and time. The

Alternatives Analysis concluded that achieving penetration of95% would take seven

years and require an additional annual investment approximately ten times greater than

the current level, or approximately $13 million annually.

B. Low-Income Grant Programs - HEARTWAP

The Commonwealth's Heating Emergency Assistance Retrofit Task

Weatherization Assistance Program ("HEARTWAP") provides heating system repair and

replacement to low-income households. The Alternatives Analysis estimated that

achieving 95% penetration through this mechanism would require 63 years and an

additional annual investment of approximately $58 million.

40 http://aceee.org/utilitv/ngbestprac/u035.pdf?CFID=2231283&CFTOKEN=63561545, accessed 3/17/09

41 http://aceee.orgipubs/u081/muni-programs.pdf, accessed 3/17/09

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
C. Tax Incentives

The Commonwealth implemented a tax incentive for 2005 through 2007. The

program provides a tax credit ofthe lower of30% ofthe eligible expenditures or $600 for

energy efficient heating items. The Alternatives Analysis estimated that ramping up this

program to achieve 95% penetration would require an additional annual public

investment of approximately $3 million and take 18 years.

D. Consumer Financing Programs - HEAT Loan

The HEAT Loan Program offers qualified residential customers loans of up to

$15,000 with seven year tenns at zero percent interest for energy efficiency

improvements, including high efficiency furnaces. The Alternatives Analysis estimated

that to achieve 95% penetration this program would need to add an additional $4.5

million annually for 27 years.

E. Public Information & Customer Education Campaigns - Residential

Conservation Services

Residential Conservation Services ("RCS~') is a component ofthe

Commonwealth's comprehensive efficiency offering for non-low income residential

energy customers. The program provides on-site analysis, advice, and implementation

assistance for energy efficiency upgrades and retrofits. The Analysis estimated that it

would require 21 years and an additional annual investment of $23.6 million to achieve

95% penetration of high efficiency furnaces.

F. Alternatives Analysis Conclusion

The Alternative Analysis concluded that to achieve a market penetration of 950/0

would require between 6 to 63 years and cost between $2.99 million and $57.67 million.

The Alternative Analysis approached each alternative as a stand-alone policy. It does not

incorporate adjustments for interactive effects. It also held the diffusion curves constant.

These analytic approaches are conservative, in that they likely understate the cost and

time required to achieve the same end as the Commonwealths proposed standard through

alternative mechanisms.

- 29-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
V. Conclusion

Based on our research, Optimal Energy Inc has determined that the

Commonwealth has an unusual and compelling interest that can only be served by the

adoption of an efficiency standard of 900/0 AFUE or better for non-weatherized gas

furnaces. We have further determined that this standard will have no adverse impact on

the market channel and will have a positive net benefit for consumers and residents.

- 30 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
ATTACHMENT E

THE COMMONWEALTH'S ALTERNATIVES

ANALYSIS

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
UNITED STATES DEPARTMENT OF ENERGY

Alternatives and Economic Analysis in Support of the

Commonwealth of Massachusetts' Petition to Exempt from

Federal Preemption Massachusetts' 90% Annual Fuel

Utilization Efficiency Standard for Non-Weatherized Gas

Furnaces.

Prepared by:

The Massachusetts Department of Energy Resources, a Department of

the Massachusetts Executive Office of Energy & Environmental Affairs

Vivek Mohta, Director, Energy Reliability & Markets

and

Vivek Sakhrani, Research Assistant, Massachusetts Department of

Energy Resources

September 30,2009

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Table of Contents

Page

1. Introduction and Summary 1

1.1 History ofthe Commonwealth's Proposed New Standard and

the Need for a Waiver of Federal Preemption 1

1.2 Non-Regulatory Alternatives Studied by the Commonwealth.. .......... 1

1.3 The Commonwealth's Proposed 90% AFUE Standard is

Overwhelmingly Preferable to the Alternatives 2

1.4 The Commonwealth's Specific Findings on Cost and

Implementation Schedules 3

2. Methodology 4

2.1 Diffusion Theory and Levels ofPenetration 4

2.2 Cost per Level ofPenetration 7

2.3 Maximum Levels of Penetration 7

2.4 Cost Responsibility 8

2.5 Policy Interactions 8

3. Non-Regulatory Alternatives 9

3.1 Consumer Rebate Programs - GasNetworks 9

3.2 Consumer Financing Assistance - HEAT Loan Program 12

3.3 Tax Incentives - Heating Energy Assistance and Tax

Relief Act of 2005 14

3.4 Low Income Assistance Program - HEARTWAP 16

3.5 Public Education - Residential Conservation Services 18

4. Regulatory Standard 21

4.1 Rationale for the Standard 21

4.2 Cost ofthe Standard 22

- 1 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Page

5. Conclusions 23

5.1 Summary ofAnalysis 23

5.2 Limitations ofthe Analysis 24

References 25

List of Figures

Figure 1.

Figure 2.

Figure 3.

Figure 4.

Figure 5.

Figure 6.

Figure 7.

Table 1.

Table 2.

Table 3.

Table 4.

Market Penetration as a result ofExternal and Internal Influences 5

Dependence ofthe Level ofPenetration on the Success Rate 6

GasNetworks - Market Penetration Curve 11

REAT Loan - Market Penetration Curve 14

Tax Incentive - Market Penetration Curve 16

HEARTWAP - Market Penetration Curve 18

RCSlMassSAVE - Market Penetration Curve 21

List of Tables

Non-regulatory Alternatives to Federal NWGF Standards 1

Estimated Success Rate ofAlternative based on Individual Penetration... 7

GasNetworks Rebates for Residential High-Efficiency

Heating Equipment 9

High-efficiency NWGF Rebates Awarded from 2002

- 2008 ($ nominal) 10

-11-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Table 5.

Table 6.

Table 7.

Table 8.

Table 9.

Table 10.

Table 11.

Table 12.

Table 13.

.Table 14.

Table 15.

Table 16.

Table 17.

Table 18.

Page

Estimated GasNetworks Program Administration Costs 10

GasNetworks - Estimated Time and Additional Costs

Requirements. ........ .......... ..... ......... ..................... ............ ... 11

Energy Efficiency Improvements Eligible for the HEAT

Loan Program 12

HEAT Loan Program Costs in 2008 .13

HEAT Loan - Estimated Time and Additional Costs

Requirements , 13

Heating Equipment Tax Incentives of2005-2007 15 .

Tax Incentive - Estimated Time and Additional Costs Requirements..... 15

HEARTWAP High-Efficiency NWGF Program Costs 2007-2009. ..... 17

HEARTWAP - Estimated Time and Additional Costs Requirements..... 17

Target RCSlMassSAVE Energy Efficiency Improvements 19

RCSlMassSAVE Program Budget for the Commonwealth

2007-2009 20

RCSlMassSAVE - Estimated Time and Additional

Cost Requirements. ................. ............ ....... ........... ... ........... 20

Estimated One-time Cost ofthe Standard 23

Estimated Time and Cost Requirements for Non-regulatory

Alternatives 23

- 111 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
1. Introduction and Summary

1.1 History ofthe Commonwealth's Proposed New Standard and the Needfor a

Waiver ofFederal Preemption.

In 2005, the Legislature ofthe Commonwealth of Massachusetts promulgated a

revised statute, Massachusetts General Laws ("M.G.L.") Chapter 25B, § 5, providing that

to be eligible for sale in the Commonwealth, non-weatherized gas-fired, residential

furnaces C1NWGF") must meet or exceed annual fuel utilization efficiency ("AFUE") of

90%, which is more stringent than the United States Department ofEnergy's ("DOE")

current 80% AFUE efficiency standard.! Mass. Acts 2005, Ch. 139, § 11. The

Massachusetts Department ofEnergy Resources ("DOER"), which is a Department ofthe

Massachusetts Executive Office ofEnergy & Environmental Affairs, implemented this

statutory change by the passage ofregulations found at 225 Code ofMassachusetts

Regulations ("C.M.R.") 9.03. This regulatory scheme cannot become effective, however,

unless and illltil the United States Department ofEnergy ("DOEll) grants the

Commonwealth a waiver from federal preemption pursuant to § 327(d) ofthe Energy

Policy and Conservation Act ('IEPCA") (42 U.S.C. 6297(d)), upon a showing, by a

preponderance ofthe evidence, that the proposed standard is necessary to meet "unusual

and compelling State or local energy ... interests."

1.2 Non-Regulatory Alternatives Studied by the Commonwealth.

To support the instant Petition for a waiver offederal preemption, DOER and

Massachusetts Attorney General Martha Coakley (collectively the "Commonwealth")

have conducted this Analysis ofthe potential benefits and consequences ofimplementing

the Commonwealth's proposed 90% AFUE high-efficiency standard for NWGF

compared to other non-regulatory alternative approaches. The Commonwealth has

identified five such alternatives to the new 90% AFUE standard, which are listed in the

following Table 1:

Table 1. Non-regulatory Alternatives to Federal NWGF Standards

• Consumer rebate programs

• Low-income grant programs

• Tax incentives

• Consumer financing programs

• Public information and customer education campaigns

I To be precise, the 80% standard, first promulgated November 19, 2007, by DOE, was subsequently

challenged in the Second Circuit Court of Appeals. That rule has been voluntarily remanded to DOE for

further rulemaking and comment' .

- 1 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
1.3 The Commonwealth's Proposed 90% AFUEStandard is Overwhelmingly

Preferable to the Alternatives.

As described in more detail below, although the intended benefits ofthe proposed

90% AFUE NWGF standard may also be achieved through these kinds of non-regulatory

alternative methods, the Commonwealth has concluded that the cost ofimplementing the

proposed 90% AFUE standard is significantly lower than the cost of any ofthe

considered non-regulatory alternatives and would be the most timely policy to achieve

maximum market penetration.

We have reached this conclusion supporting the Commonwealth's waiver Petition

in part because there has already been high market penetration of high-efficiency

furnaces in Massachusetts, which makes it difficult and less cost-effective for voluntary

programmatic efforts to further influence market penetration. This existing high market

penetration has resulted, among other reasons, from the Commonwealth's aggressive and

comprehensive implementation of alternative non-regulatory approaches for acquiring

energy savings from the installation ofmore efficient gas furnaces, but those approaches

have largely reached their maximum benefit.

This last point is critical for understanding the analysis that follows. The

Commonwealth does not believe that it can actually attain the policy objective of95%

penetration of high-efficiency NGWF through any ofthe five alternatives analyzed

below, nor is the Commonwealth aware of any precedent in any other state that suggests

95% penetration could be achieved through non-regulatory approaches. As just noted

above, and as also discussed in section IILB.2. ofthe report prepared by Optimal Energy

Inc. for the Commonwealth,2 the Commonwealth believes that penetration of highefficiency NWGFs has reached a plateau which cannot be significantly improved upon

through voluntary, non-regulatory approaches. However, in order to present an "applesto-apples" comparison ofwhat the costs would be to attain 95% penetration via the

regulatory approach and the five alternatives listed in Table 1, above, the analysis in this

report assumes that 95% penetration could be achieved through each ofthe alternatives.

By making this analytic assumption in order to derive hypothetical costs for each

alternative, the Commonwealth is in no way expressing its opinion that such a high

penetration level could in fact be achieved through any approach other than by mandatory

regulation.

Commonwealth regulation in the fonn of a more stringent 90% AFUE standard is

therefore preferable to the alternatives available to the Commonwealth as the most

feasible and cost-effective way to further increase market penetration of high efficiency

furnaces.

In perfonning this Analysis, the Commonwealth has used the epidemic model, a

widely used technology diffusion model, to approximate the level of penetration of highefficiency NWGF in total NWGF sales in the Commonwealth, and the associated costs of

2 See also Figure 13 ofthe Optima Report.

- 2-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
the alternatives. The expected market penetration of high-efficiency NWGF due to the

proposed regulation is assumed to be 95%. The analysis compares alternatives at 75%,

85% and 95% penetration and assumes that 95% is the maximum achievable penetration

through the use of a non-regulatory alternative.

1.4 The Commonwealth's Specific Findings on Cost and Implementation

Schedules.

Applying the model, the Commonwealth made the following considered findings:

Cost ofthe Regulation: Inclusive ofpromulgation, implementation and possible

enforcement, the cost ofthe new 90% standard to achieve 95% market penetration is

approximately $24,000, and is an initial, non-recurring expense. This contrasts with the

much greater costs ofimplementation of various potential non-regulatory alternatives,

which include:

Consumer Rebate Programs: The GasNetworks program requires 3 to 7 years to

achieve market penetrations of75-95% at additional costs in the range $5.5 to $12.8

million.

Consumer Financing Assistance: The HEAT Loan program requires 4 to 27

years to achieve market penetrations of 75-950/0 at additional costs in the range $0.67 to

$4.49 million.

Tax Incentives: The heating assistance tax incentive requires 3 to 18 years to

achieve market penetrations of75-95% at additional costs in the range $0.49 to $2.99

million.

Low Income Grant Program: The Heating Emergency Assistance Retrofit Task

Weatherization Assistance Program ("HEARTWAP") requires 10 to 63 years to achieve

market penetrations of 75-95% at additional costs in the range $9.15 to $57.67 million.

Public Information and Education Programs: The Residential Conservation

Services ("RCS" )/MassSAVE program requires 4 to 21 years to achieve market

penetrations of 75-950/0 at additional costs in the range of$4.50 to $23.64 million.

Ofthe non-regulatory alternatives, the GasNetworks program requires the least

implementation time, approximately 6 years,-for 95% penetration. Tax incentives require

the least cost, $2.99 million, for a 95% penetration. Compared to the very low costs of

implementing a regulatory standard that is expected to achieve 95% penetration ofnew

NWGF shipments upon the effective compliance date, none ofthe non-regulatory

alternatives can be considered reliable stand-alone policies.

This alternative analysis overwhelmingly indicates that the new 90% AFUE

regulatory standard would be the most timely and cost-effective policy to achieve

maximum market penetration.

- 3 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
2. Methodology

Section 2 ofthis Analysis describes the methodology employed to review the

considered non-regulatory alternatives.

2.1 Diffusion Theory and Levels ofPenetration

The extensive economic literature on the diffusion process of new products

indicates that there are a number of drivers affecting the process. Some prior work

attempts to develop analytical models of diffusion patterns of new products. However~

the diverse characteristics of products and nature of consumer adoption make it difficult

to develop models that are universally applicable. Despite this difficulty, theoretical

predictions and empirical studies have led to the following recognitions.

First, new technologies may not be adopted by all potential users in the market~

regardless oftheir economic benefits and technological merits. Therefore, market

penetration is typically characterized by eventual saturation at less than 100% ofthe

available market. Second, not all adopters purchase new products at the same time.

Early adopters purchase new products soon after invention and commercialization, while

others respond slowly, waiting for products to become more mature. In fact, adoption

can lag invention by as much as an order ofmagnitude ofdelay. Moreover, the adoption

trends differ by the nature ofthe product; for instance, consumer products are adopted at

different rates than industrial products. Third, diffusion processes can be approximately

characterized by asymmetric "S-curves" that chart the rate of adoption of a technology

over time. The logistic function in Figure 1, below, is an example of a typical S-curve.

The epidemic model, a widely used technology diffusion model, is used to

approximate the level of penetration of high-efficiency NWGF in total NWGF sales in

the Commonwealth. The model assumes that all consumers value the benefits of a highefficiency NWGF identically and that the cost ofthe NWGF is constant over time. The

factor that influences the customer to adopt a high-efficiency NWGF is information about

the availability and the benefits ofthe product. That is, information diffusion drives new

technology adoption by individual consumers. The model includes information diffusion

from marketing efforts (modified exponential function of external influences) and word

ofmouth diffusion (logistic function ofinternal influences) from existing users.

-4-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
100%

9()O,/o

~~

c

.! 70%

lwI 6(}l>,/o ....

4,l

=- 500'0

... 40010 J.

.:s 30% iI':.

2()4;O

10%

~'O

0 10 15

Year

20 25 30

Figure 1. Market Penetration as a result of External and Intemal Influences

Source: Federal N\VGF Standard Regulatory Impact Analysis, DOE (2007)

Determining the contribution from word ofmouth information diffusion to market

penetration in the Commonwealth is difficult. The extent ofsuch infonnation diffusion

depends on the propensity of high-efficiency NWGF users to voluntarily communicate

with and influence non-users and cannot be estimated or predicted easily. The alternative

analysis therefore assumes that word ofmouth infonnation diffusion cannot be relied

upon to significantly increase the penetration ofhigh-efficiency NWGFs. On the other

hand, the marketing efforts ofwide-spread energy efficiency programs already

implemented in the Commonwealth includes promotions ofhigh-efficiency NWGFs.

Moreover, the costs ofmarketing efforts in any program alternative can be budgeted and

considered before the selection ofthe alternative. The analysis therefore assumes that

any change in the level ofmarket penetration can only be attributed to the marketing

efforts ofthe alternatives, i.e. the external influencers that can be controlled.

We note that the analysis focuses only on new NWGF shipments. Thus, the

market penetration value is the percentage ofhigh-efficiency furnaces oftotal new

NWGF shipments in the Commonwealth.

A key assumption ofthe external influence theory is the success rate ofthe

influence, or in other words the percentage of consumers that adopt the new technology

upon receiving information about it. Figure 2 depicts the dependence ofthe level of

penetration over time on the success rate ofinformation diffusion.

-5-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Market Penetration under External Influence

-25% Influence

-50% Influence

-75% Influence

8 10 12 14

Time (Years)

2 4 6

100

90

80

70

c 60 0

..

e

Gi 50 c

4>

a.

'Z

«l

:!:

20 ~f--I'----------------------------I

10 +--"~-------------------------I

Figure 2. Dependence ofthe Level of Penetration on the Success Rate

Although predicting the success rate of a policy alternative is difficult, the

analysis makes assumptions about the rate based on the nature ofthe alternative and any

available historical data on the programs under the alternative. The analysis assumes that

the success rate for an alternative can be approximated by its contribution to the total

current market penetration, The aggressive marketing efforts of existing programs in the

Commonwealth have led to the observed market penetration of 64 to 70% oftotal new

NWGF shipments between 2001 and 2007.3 Therefore, the total current market

penetration in the Commonwealth is assumed to be 67%, the average ofthe 2001-2007

range. The estimated contribution of each existing policy alternative to the total market

penetration, called the individual penetration, is shown in Table 2.

3 See Report and Analysis in Support ofthe Commonwealth ofMassachusetts' Petition to Exempt from

Federal Preemption Massachusetts' 90% Annual Fuel Utilization Efficiency Standard for Non-Weatherized

Gas Furnaces, prepared by Tom Franks & Alek Antczak, Optimal Energy Inc., dated September 30,2009.

- 6 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Table 2. Estimated Success Rate ofAlternative based on Individual Penetration

Source: Compiled from statistics provided by program administrators

Contribution to Individual Alternative Total Market

Penetration Penetration

Consumer Rebate 55% 37%

Financing Assistance 10% 7".10

Low Income Grant 5% 3%

Tax Incentive 16% 110/0

Public Education 14% 9%

Total 100% 67%

The cuttent individual penetration for each alternative is used to approximate the success

rate for estimating the future levels ofmarket penetration for that alternative.

2.2 Cost per Level ofPenetration

The cost effectiveness of alternatives is compared by calculating the costs of each

alternative per level ofmarket penetration. The method not only considers the historical

costs ofthe alternatives implemented by the Commonwealth but also forecasts costs that

are expected to be incurred with increasing market penetration.

An approach that is different from the traditional benefit-to-cost ratio approach

used for comparing policy alternatives is selected to avoid the complications of benefit

quantification. The method focuses on assessing the program costs ofthe alternatives,

while normalizing the program benefits realized. 4 This approach is possible because the

program welfare benefits gained from a given level ofmarket penetration are identical,

irrespective ofthe policy alternative used to achieve that level of penetration. For

example, assume that the desired share of high efficiency NWGF oftotal NWGF sales is

75%. Then, the benefits obtained from the 750/0 penetration are identical, irrespective of

the choice of alternative. Therefore, the analysis reduces to a comparison of costs for the

same level of penetration across all the alternatives.

2.3 Maximum Levels ofPenetration

The non-regulatory alternatives will always result in a penetration ofless than

1000/0 due to the nature oftechnology diffusion, as described in Section 2.1. Thus, any

realistic goal for the desired market penetration through the use of an alternative will

have to be at less than 100%. Additionally, the cost ofimplementing a standard is the

same, whether the desired market penetration is less than or equal to 100%. As a result, it

is almost certain that the standard is the best and most cost-effective method for

4 Private benefits in the form of bill savings are also identical in all cases and exceed private costs, i.e. the

incremental cost of a high-efficiency NGWF, in all cases. Thus, private benefits and costs are excluded

from this analysis of alternatives.

- 7 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
extremely high levels of penetration, close to 100%. Therefore, this analysis aims to

validate the cost-effectiveness ofthe standard not only for high penetrations, but also for

levels much lower than 100% , for instance 75 or 85%.

The nature ofthe market for NWGFs in the Commonwealth and issues associated

with residential housing infrastructure imply that some new purchases will continue to be

low-efficiency NWGFs. It is expected that about 5% of all new NWGF purchases will

continue to be below 90% AFUE.5 The expected market penetration of high-efficiency

NWGFs due to the promulgated regulation is therefore 95%.

The level of penetration of high efficiency NWGF as a percentage oftotal NWGF

sales in Massachusetts was 64 - 70% between 2001 and 2007. The analysis described in

this document therefore compares alternatives at 75%, 85% and 95% penetration and

assumes that 95% is the maximum achievable penetration through the use of a nonregulatory alternative.

2.4 Cost Responsibility

Initially, program costs may be incurred by different entities depending upon the

choice ofthe alternative. However, the costs ofimplementing a standard or any ofthe

non-regulatory alternatives are eventually borne broadly by the public. For instance, state

agencies will bear the administrative cost ofimplementing the standard. If an alternative

such as a rebate program is chosen, utilities will bear the setup and customer support

costs. Ifthe standard is implemented, the administrative costs will be supported by

consumers through tax revenues. If a rebate program is selected, the total amount in

rebates paid out by a utility's rebate program to will be distributed across and recovered

from all rate-payers. Thus, the cost per level ofpenetration method analysis uses the total

program costs involved, irrespective ofthe entity which initially incurs them.

In some cases, complete program cost infonnation is unidentifiable or

unavailable. The analysis is still valid ifthe "incomplete" total costs for a level of

penetration are greater than the cost ofthe standard.

2.5 Policy Interactions

Certain policies are often most effective when implemented in combination to

provide incentives, such as combining consumer rebates or tax incentives with puplic

education programs. The existence ofmore than one policy may have a synergistic effect

ofincreasing the level of penetration. In reality, however, measuring and predicting such

synergistic effects is quite difficult. To avoid the pitfalls offorecasting synergistic

effects, combinations of alternatives are not considered. The impact on level of

penetration ofhigh efficiency NWGF sales due to each alternative is assumed to be

independent ofthe existence and interactions of other alternatives. The cost per level of

penetration is therefore calculated independently for each alternative.

5 Information provided by the Commonwealth's Department ofHousing and Community Development

- 8 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
3. Non-Regulatory Alternatives

This section provides detailed information about existing programs in the

Commonwealth that exemplify the non-regulatory alternatives listed in Table 1. A brief

description of each program is provided, and recent cost data and estimated future costs

for the scenarios of75, 85 and 95% ofmarket penetration are analyzed.

3.1 Consumer Rebate Programs - GasNetworks

GasNetworks is a collaborative consisting oflocal natural gas utility companies

serving residential and commercial & industrial customers throughout New England.

The collaborative has been promoting energy efficiency and the use ofhigh efficiency

natural gas technologies since 1997. In 1997, GasNetworks began the process of

developing Energy Efficiency-Market Transformation programs. The original

collaborative membership consisted ofrepresentatives from five Massachusetts gas

utilities. Over the past six years, the membership has been broadened to include

additional utilities throughout New England. GasNetworks receives support and

endorsements from DOER, Northeast Energy Efficiency Council, Massachusetts LowIncome Energy Affordability Network, Massachusetts Department of

Telecommunications and Energy, Northeast Gas Association and the Office of

Massachusetts Attorney General Martha Coakley.

A central component ofthe GasNetworks initiative is its residential highefficiency heating equipment rebate program. Rebates up to $1,300 are available for

heating equipment that meets or exceeds the AFUE ratings as shown in Table 3.

Table 3. GasNetworks Rebates for Residential High-Efficiency Heating Equipment

Source: GasNetworks

$100 rebate

S200 rebate

S400rebate

5500 rebate

S1000 rebate

$1300 rebate

\VannAir Furnaces .2:92~~ AFUE rating

Steam Boilers ~82~o AFUE rating

·Ularm....ljrFurnaces ~92% AFUE fating equipped with Electronic CommutatedMotor

(EC1J1) or e.quiV3lent advanced furnace fan system

Forced Hot \VaterBoilers ~85~1o AFUE rating

Forced Hot \Vater Boilers 2:90% _AFUE rating

Combined High-EfficiencyBoiler and Vlatef" Heating Unit ';;::90~'Q AFUE rating with hot

waterstorage of2gallons or less

The rebates for NWGF require a minimum of 92 percent AFUE and are $100 for

warm air furnaces and $400 for warm air furnaces equipped with an Electronic

Commutated Motor. Thus, the program already provides incentives for furnace

efficiency levels that are higher than the proposed standard of 90 percent AFUE. The

- 9-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
largest cost component ofthe GasNetworks residential rebate program for high-efficiency

rebates is the rebates awarded by participating utilities as shown in Table 4. Program

administration costs for GasNetworks are shown in Table 5.

Table 4. High-efficiency NWGF Rebates Awarded from 2002 - 2008 ($ nominal)

Source: Analysis of data provided by GasNetworks, J\;1A DPU filings

UtiIi1y 2003 2004 2006 200l 2008* 7YearTdaI

B3ySl:cte~ $540,000 $150,2Xl $166,900 $2)9,400 $241,5)0 $193,800 $175,400 $1,677,2lO

Berkshire Gas $54,000 $13.000 $13.000 $24,300 $28,100 $1~9OO $20,700 $173,g)()

KeySpa1 Energy $1,347,600 $597,000 $542,600 $558,200 $677,aJO $656,500 $0 ~38O,mo

Fall River GBs $21,000 $3.310 $5,300 $5,600 $2,000 $5,900 $7,600 $51,000

RtdtJurg Gas $3,300 $2,000 $1,900 $3,500 $5X) $1,900 $2,700 $16,400

~D $0 $0 W $0 $0 $7,000 $1,342,353 $1.~353

NSTAAGBs $313,200 $101,2Xl $191,100 $146,300 $187,400 $153,400 $103,000 $1,195,ti)()

Tataf $2,279,100 $869,000 ~20,800 $947,300 $1,1~,2Xl $1,038,400 $1,651,753 $8,844553

* Jan 1- ~m, 2008

Table 5. Estimated GasNetworks Program Administration Costs

Source: Analysis of data provided by GasNetworks,}vIA DPU filings

Utility 2002 2003 2004 2005 2006 2007 2008* 7 Year Total

Bay Stale Gas $151,043 $115,019 $102,142 $110,990 $104,828 $79,706 $65,407 $729,135

Berkshire Gas $23,Q63 $19,508 $15,953 $19,745 $19,003 $16,743 $16,664 $131,579

KeySpan Energy $363,711 $457,563 $334,639 $267,805 $285,264 $268,674 $0 $1,977,656

Fall River Gas $14,373 $11,450 $11,134 $11,608 $11,134 $11,134 $11,529 $82,362

Fitchburg Gas $9,712 $10,897 $9,870 $10,186 $9,238 $9,396 $9,791 $69,090

NGRID $0 $0 $0 $0 $0 $11,055 $452,665 $463,720

NSTAR Gas $91,319 $81,839 $98,350 $73,228 $81,997 $62,010 $42,576 $531,319

Total $653,221 $696,276 $572,088 $493,562 $512,364 $458,718 $598,632 $3,984,861

• Jan 1 - Sep 30, 2008

The analysis assumes that the average total annual cost of$1,832,773 for the

program does not change in future years. Based on the available data about the current

market penetration ofhigh-efficiency NWGF, 37% ofthe penetration is attributed to the

GasNetworks program. This individual penetration is also used to approximate the

success rate for the program in future years. The resulting time requirement to achieve

the desired levels of penetration of 75, 85 and 95% is shown in Table 6. The time

requirement in each case multiplied by the average total annual cost for the program

gives the estimated additional cost per level ofpenetration.

Under the stated assumptions, the GasNetworks program requires 3 to 7 years to

achieve market penetrations of 75-95% at additional costs in the range $5.5 to $12.8

million.

- 10-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Table 6. GasNetworks - Estimated Time and Additional Costs Requirements

Average An nual Cost ($) $1,832,773

Success Rate (%) 37%

Penetration Level Expected Time Estimated Add itia nal Cost

(%) (years) ($)

75% 3 5,498,319

85% 4 7,331,092

95% 7 12,829,411

Figure 3 is a graphical depiction ofthe estimated market penetration curve for the

GasNetworks program, assuming a success rate of 370/0.

Market Penetration vs. Time assuming a Success Rate =37%

100

95

90

0

l:

.9 85

dl

l:

£

.. 80

nI

:i!;

75

70

65

0 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Time (years)

Figure 3. GasNetworks - Market Penetration Curve

- 11 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
3.2 Consumer Financing Assistance - HEAT Loan Program

MassSAVE is an energy savings program for Massachusetts homeovvners and

renters. It offers energy tips and information about free home energy assessments,

energy-saving products, and loans, rebates, and other incentives for energy-saving home

improvements. MassSAVE is a partnership between the Massachusetts gas and electric

utility companies and local sellers and installers of home energy conservation products.

The HEAT Loan Program, a component of MassSAVE, offers financing assistance to

residential consumers.

Table 7. Energy Efficiency Improvements Eligible for the HEAT Loan

Program

• Attic, Wall, and Basement Insulation

• High Efficiency Heating Systems including Furnaces and Boilers

• High Efficiency Domestic Hot Water Systems

• Solar Hot Water Systems

• Energy Star Windows

• Energy Star Thermostats

The HEAT Loan Program provides customers the opportunity to apply for a 0%

loan from participating lenders for the installation of qualified energy efficient

improvements in their homes. Loans of up to $15,000 are available (depending on

utility) with terms ofup to 7 years. To apply for the loan, the customer must own and

reside in a one to four family residence and obtain a Home Energy Assessment through

the MassSAVE program. A customer can obtain a loan by completing the following

process for any ofthe improvements listed in Table 7:

1. Customers must sign up for a Home Energy Assessment from an authorized

MassSAVE vendor.

2. A MassSAVE representative will assess the customers' energy efficiency

improvement needs and determine what improvements are eligible for financing.

The representative will provide the customer with HEAT Loan Intake Form,

Program Steps and Minimum Standards and Requirements.

3. Customers may obtain pre-approval from a participating lender ifthey choose.

4. Customers obtain written contractor price proposal(s) for the installation ofthe

improvements.

5. Customers forward the proposal(s) for review and approval by their MassSAVE

HEAT Loan administrator listed on their electric utility HEAT Loan Intake Form.

6. Once approved, customers will receive a HEAT Loan Authorization Form from

the MassSAVE vendor that authorizes the lender to process the REAT Loan.

- 12-

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
7. Customers finalize the loan with a participating lender and obtain two party

checks.

8. Measures are installed and MassSAVE conducts a post installation inspection on

the installed improvements.

The costs incurred to administer the HEAT Loan program in 2008 are shown in

Table 8. Ofthe total program costs for financing all eligible improvements,

approximately 72%, or $1,847,766, were incurred to finance heating systems.

Improvements involving NWGF of 92 percent AFUE or better comprised 90/0 ofthe total

program costs, or $166,299.

Table 8. HEAT Loan Program Costs in 2008

Source: HEAT Loan program administrator Conservation Services Group

Heating Gas Average Gas

Total Amount Total Program System Heating System Furnace Furnace

Financed Costs Share Program Costs Share Program Costs

$ 8,379,780 $ 2,566,341 72% $ 1,847,766 9% $ 166,299

The analysis assumes that the 2008 annual cost of$166,299 for the program does

not change in future years. Based on the available data about the current market

penetration of high-efficiency NWGF, 7% ofthe penetration is attributed to the HEAT

Loan program. This individual penetration is also used to approximate the success rate

for the program in future years. The resulting time requirement to achieve the desired

levels of penetration of75, 85 and 95% is shown in Table 9. The time requirement in

each case multiplied by the 2008 annual cost for the program gives the estimated

additional cost per level of penetration. Under the stated assumptions, the HEAT Loan

program requires 4 to 27 years to achieve market penetrations of75-95% at additional

costs in the range $0.67 to $4.49 million.

Table 9. HEAT Loan - Estimated Time and Additional Costs Requirements

Average Annual Cost ($) $166,299

Success Rate (%) 7%

Penetration Level Expected Time Estimated Additional Cost

(%) (years) ($)

75% 4 665,196

85% 12 1,995,588

95% 27 4,490,073

- 13 -

EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Market Penetration vs. Time assuming a Success Rate =7%

100 -r-------------------------------.......,

90

0

c:

0 85

a;

c:

41

a.

...

<i> 80

<II

:2:

75

70

65

0 5 10 15

Time (years)

20 25 30 35

Figure 4. HEAT Loan - Market Penetration Curve

Figure 4 is a graphical depiction ofthe estimated market penetration curve for the HEAT

Loan Program, assuming a success rate of 7% '

3.3 Tax Incentives - Heating Energy Assistance and Tax ReliefAct of2005

An "Act Relative to Heating Energy Assistance and Tax Relief' ("the Act") was

signed into law in the Commonwealth on November 22,2005 (See St. 2005, c. 140).

Under the Act, certain taxpayers subject to the personal income tax imposed by M.G.L. c.

62 were eligible for a deduction for certain expenses for home heating, and for a credit

for energy-efficient heating items installed in residential property located in

Massachusetts. Also under the Act, taxpayers subject to the corporate excise imposed

by M.G.L. c. 63 may have been eligible for a credit for energy-efficient heating items

installed in residential property located in Massachusetts.

Subject to certain limitations, a person or entity subject to taxation under M.G.L.

c. 62 or M.G.L. c. 63 that is the owner ofresidential property located in Massachusetts

could claim a credit in the amount ofthe net expenditure for energy-efficient heating

items "purchased on or after November 1,2005, but not later than March 31, 2006, for

installation in said property." S1. 2005, Ch. 140, §§ 15 and 16. The Act defined "energyefficient heating items" as follows:

~'Energy efficient heating items" shall include, but not be limited to, home

insulation, new window installation, advanced programmable thermostats,

fuel efficient furnaces, boilers, oil, gas, propane, or electric heating

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
systems, solar domestic hot water systems, materials for insulation or

sealing of a duct, attic, basement, rim joint or wall and pipe insulation for

heating systems."

To be a qualified purchase for purposes ofthe credit, the item purchased must have been

one ofthe items listed in the Act or the item must similarly have related to heat

conservation, as opposed to some other type of energy-efficient items. The maximum

aggregate amount ofthe energy-efficiency heating credit that may have been claimed by

a qualifying taxpayer for the cost of energy efficient heating items was the lesser of30%

ofthe net expenditure for the qualifying purchases or $600 ($1,000 for a multi-unit

dwelling).

Table 10. Heating Equipment Tax Incentives of 2005-2007

Source: :i\;fassachusetts Department ofRevenue

Total Number Total Credit Assumption of Gas Credit for Gas Average

of Filers Furnaces'Share Furnaces Annual Credit

121,383 $ 51,233,000 10% $ 5,123,300 $ 1,707,767

The provisions ofthe Act allowed tax filers to receive credit in the years 2005

through 2007. The total credit claimed over the three-year period amounted to

$51,233,000 ofwhich the share ofhigh-efficiency NWGFs is assumed to be 10%.6 The

average annual credits amounted to $1,707,767. (Table 10.)

Table 11. Tax Incentive - Estimated Time and Additional Costs Requirements

Average An nual Cost ($) $1,707,767

Success Rate (%) 11%

Penetration Level Expected Time Estimated Additional Cost

(%) (years) ($)

75% 3 498,897

85% 8 1,330,392

95% 18 2,993,382

The analysis assumes that the average annual cost of$I,707,767 for the program

does not change in future years. Based on the available data about the current market

penetration of high-efficiency NWGF, 11% ofthe penetration is attributed to the tax

incentive. This individual penetration is also used to approximate the success rate for the

program in future years. The resulting time requirement to achieve the desired levels of

6 Data on existing programs in the Commonwealth such as the HEAT Loan and the Low Income grant

program indicates that high-efficiency NWGF rebates or grants are approximately 10 % ofthe total award.

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
penetration of 75, 85 and 95% is shown in Table 11. The time requirement in each case

multiplied by the average annual cost for the program gives the estimated additional cost

per level ofpenetration. Under the stated assumptions, the tax incentive requires 3 to 18

years to achieve market penetrations of75-95% at additional costs in the range $ 0.49 to

$ 2.99 million.

Market Penetration vs. Time assuming a Success Rate =11%

100

95

90

l::

.2 85

E

Q>

C

CD

a.

-

CD 80

lIS

75

70

65

0 5 10

Time (years)

15 20 25

Figure 5. Tax Incentive - Market Penetration Curve

Figure 5 is a graphical depiction of the estimated market penetration curve for Tax

Incentives assuming a success rate of 11 %

3.4 Low Income Assistance Program - HEARTWAP

The Commonwealth's Heating Emergency Assistance Retrofit Task

Weatherization Assistance Program ("HEARTWAP") provides heating system repair and

replacement services to low-income households. The program is administered by a

network oflocal agencies, and in most areas the same agency that administers the Low

Income Home Energy Assistance Program ("LIHEAP" or "Fuel Assistance")

program. HEARTWAP contracts with heating system service companies to complete the

work for eligible households. Households that are eligible for LIHEAP with a gross

annual income that does not exceed 60% ofthe Estimated State Median Income are

eligible for HEARTWAP services. The program is designed primarily to serve

homeowners. Landlords are required to maintain the heating system for their tenants

under the Massachusetts State Sanitary Code.

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Through the heating season, the program is primarily an emergency-based heating

system repair program that helps eligible homeowners pay to repair or replace defective

or unsafe heating systems. Ifsufficient funds are available after the heating season,

HEARTWAP completes maintenance work (cleans and tunes) and replaces heating

systems that are in poor condition and not worth repairing.

There are maximum allowable expenditure limits for different types ofheating

system activities. In some instances households may be required to provide a copayment. Local agencies attempt to utilize all available utility funds for system

replacements in an effort to minimize the need for client contributions.

Households are served based on need. Typically, a LIHEAP (Fuel Assistance)

eligible homeowner who has a no-heat or unsafe heating system situation will call the

local agency. The agency contracts with licensed and insured heating repair technicians

to fix the problem. To the greatest extent possible local agencies will work with the

customer's service dealer ofrecord.

The costs incurred to administer the high-efficiency NWGF component ofthe

HEARTWAP program from 2007 to 2009 are shoWn in Table 12. The average cost of

the program over the three-year period was $915,463.

Table 12. HEARTWAP High-Efficiency NWGF Program Costs 2007-2009

Source: lVlassachusetts Department ofHousing and Community Development

FY 2007 FY 2008 FY 2009*

Numberof Installations 194 162 241

Average Nominal Cost $ 4,306 $ 4,366 $ 4,995

Total Nominal Cost $ 835,303 $ 707,292 $ 1,203,795

*Year-to-date

Table 13. HEARTWAP - Estimated Time and Additional Costs Requirements

Average Annual Cost ($) $915,463

Success Rate (%) 3%

Penetration Level Expected Time Estimated Additional Cost

(%) (years) ($)

75% 10 9,154,630

85% 27 24,717,501

95% 63 57,674,169

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
The analysis assumes that the average annual cost of $915,463 for the program

does not change in future years. Based on the available data about the current market

penetration of high-efficiency NWGF, 3% ofthe penetration is attributed to the

HEARTWAP program. This individual penetration is also used to approximate the

success rate for the program in future years. The resulting time requirement to achieve

the desired levels ofpenetration of75, 85 and 95% is shown in Table 13. The time

requirement in each case multiplied by the average annual cost for the program gives the

estimated additional cost per level of penetration. Under the stated assumptions, the

HEARTWAP program requires 10 to 63 years to achieve market penetrations of 75-95%

at additional costs in the range $9.15 to $57.67 million.

Market Penetration vs. Time assuming a Success Rate =3%

100 -,------------------------------_

95+----------------------------==-01........=-------1

90

c

:8 85

e:

li

c

Q)

a.

li 80

<lI

:2

75

70 +---I--------------------------------j

5 10 15 20 25 30 35 40 45 50 55 60 65 70

65 +------;-------.-------,------r---------,-------,,----.-------;-------,-----,------;------,---------,------l

o

Time (years)

Figure 6. HEARTWAP - Market Penetration Curve

Figure 6 is a graphical depiction of the estimated market penetration curve for the

HEAR1WAP Program assuming a success rate of 3%

3.5 Public Education -Residential Conservation Services

The Residential Conservation Services ("ReS") program in the Commonwealth is

administered under Chapter 465 ofthe Acts of 1980, and pursuant to M.G.L. c. 25A, §

11A. The initiatives under the RCS program are collectively called MassSAVE. During

the period 1980 through 2000~ the RCSlMassSAVE program was an educational program

encouraging customers to upgrade the efficiency oftheir homes. Beginning in 2001, the

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
RCS/MassSAVE program began to change its emphasis from education only to education

and measure implementation. Customers are now offered incentives to implement energy

saving measures in their homes.

The program targets all non-low income residential customers living in singlefamily houses or one- to four-unit multifamily buildings, whose primary heating source is

natural gas. The program is administered within each service territory by its Program

Administrator and is coordinated statewide through the Residential Management

Committee ("RMC") that actively manages and steers the statewide MassSAVE program.

The program is delivered by program vendors selected through a competitive bidding

process. The cost-effective energy-saving improvements targeted by the program are

listed in Table 14.

Table 14. Target RCSjMassSAVE Energy Efficiency Improvements

• Building Envelope

• HVAC/Mechanical systems

• Water Heating

• Energy saving appliances and lighting

• Deep retro fit measures

• New technologies / renewables

All customers who contact MassSAVE to learn about the program are asked

several questions to determine their need for and general interest in making energyefficient improvements. Customers are guided to appropriate program services provided

by energy efficiency vendors including targeted energy efficiency information, advanced

diagnostics, efficiency rebates, and deep energy retrofit support. Low-income customers

are referred to appropriate low-income programs. When appropriate, a series ofhome

visits are offered to further engage the customer and proceed in a logical and methodical

process ofidentifying and informing customers of all available energy savings

opportunities. The home visits include:

Screening Visit: An in-home visit designed to provide general information and

education about energy efficiency and identify opportunities and challenges for

energy saving installations. Customers' specific needs are identified and they are

directed to other energy efficiency resources as appropriate.

Diagnostic Visit: A comprehensive energy assessment including a variety of

diagnostic techniques such as blower door tests, infrared scanning, and duct leakage

testing (based on vendor determination). Wherever feasible, full installation of air

sealing, duct sealing, and programmable thermostats are provided at no cost to the

customer. The savings from the direct install measures are designed to cover the cost

ofthe visit. Specific energy efficient upgrades that require professional contractors, as

well as, a customer contribution are identified and recommended.

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Quality Assurance Visit: A visit intended to verify that all energy efficiency measures

were installed to the levels deemed appropriate by Program Administrators and to

ensure Program savings.

The Commonwealth's expended budget amounts for administering the

RCS/MassSAVE program for the period 2005 to 2009 are shown in Table 15.

Additionally, program administration and market transformation budgets for NSTAR and

National Grid, the two utilities in the Commonwealth that participate in the

RCS/MassSAVE program, amounted to $926,835 in 2009. The resulting annual program

cost in 2009 was therefore $1,125,835.

Table 15. RCSjMassSAVE Program Budget for the Commonwealth 2007 - 2009

Source: Utility energy efficiency filings, Massachusetts Department of Public Utilities

2005 2006 2007 2008 2009

Total ReS BUdget $ 183,000 $ 196,000 $ 194,000 $ 186,000 $ 199,000

Table 16. RCSjMassSAVE - Estimated Time and Additional Cost Requirements

Average Annual Cost ($) $1,125,835

Success Rate (%) 9%

Penetration Level Expected Time Estimated Additional Cost

(%) (years) ($)

75% 4 4,503,340

85% 9 10,132,515

95% 21 23,642,535

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Market Penetration vs. Time assuming a Success Rate =9%

100

95

90

g

c: 85

CIl

C

Cl>

D-

'S 80

t:

<G

:5

70 -t-#--------------------------------;

15 20 25 30

Time (years)

5 10

65 -1-----,---------------,---------,.---------,---------,---------1

o

Figure 7. RCS/MassSAVE - Market Penetration Curve

Figure 7 is a graphical depiction ofthe estimated market penetration curve for the

RCSjMassSAVE Program assuming a success rate of 9%

The analysis assumes that the average annual cost of$1,123,835 for the program

does not change in future years. Based on the available data about the current market

penetration of high-efficiency NWGF, 90/0 ofthe penetration is attributed to the

RCSIMassSAVE program. This individual penetration is also used to approximate the

success rate for the program in future years. The resulting time requirement to achieve

the desired levels of penetration of75, 85 and 95% is shown in Table 16. The time

requirement in each case multiplied by the average annual cost for the program gives the

estimated additional cost per level of penetration. Under the stated assumptions, the

RCSIMassSAVE program requires 4 to 21 years to achieve market penetrations of75-

95% at additional costs in the range $4.50 to $23.64 million.

4. Regulatory Standard

4.1 Rationalefor the Standard

A regulatory standard for appliance efficiency in a given market is effective in

significantly increasing the appliance's market penetration when appliances that meet or

exceed the standard are readily available and have already attained a high market

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
penetration through other market-based or voluntary methods. The analysis conducted by

the Commonwealth in support ofits petition for a waiver indicates that the market

penetration of high-efficiency NWGF of at least 900/0 AFUE in the Commonwealth was

67% on average between 2001 and 2007. Additionally, the analysis concluded that

promulgating the standard would not negatively affect furnace manufacturers, other

regional markets, or the national market because it is widely available. In fact, highefficiency NWGFs are a major product offering under the EnergyStar program.

Furthermore, the descriptions ofthe five non-regulatory alternatives and the associated

cost and penetration data in Section 3 demonstrate that these market-based and voluntary

programs have been aggressively implemented in the Commonwealth. However, these

programs will have to overcome additional barriers ifthey are to significantly increase

market penetration Lack of awareness on the part ofsome consumers, difficulty in

assessing life-cycle costs and the overall energy savings potential ofthe appliance, and

small savings on individual purchases may result in a consumer decision to purchase a

low-efficiency NWGF. A.. regulatory standard that requires the sale of only highefficiency NWGFs will decrease the decision making burden on consumers, and ensure a

significant increase in market penetration.

The nature ofthe market for NWGFs in the Commonwealth and issues associated

with residential housing infrastructure imply that some new purchases will continue to be

low-efficiency NWGFs. It is expected that about 5% of all new NWGF purchases will

continue to be below 90% AFUE7

. The expected market penetration of high-efficiency

NWGFs due to the promulgated regulation is therefore 95%. The expected penetration

will be realized after the compliance date ofthe standard, which will be selected to allow

for notification of and preparation by of all Commonwealth, consumer, market, and

industry stakeholder groups.

4.2 Cost ofthe Standard

The cost ofthe standard primarily involves two components: promulgation and

implementation. The costs of promulgation were incurred subsequent to the legislative

change in 2005, when the Commonwealth's Legislature revised M.G.L. Chapter 25B, § 5,

to provide that to be eligible for sale in the Commonwealth, NWGF must meet or exceed

AFUE of90 percent. Mass. Acts 2005, Ch. 139, § 11, revising M.G.L. c. 25B, § 5. The

cost ofpromulgation is estimated at approximately $14,000 inclusive oflegal research,

fonnulation, drafting, stakeholder meetings and updates to the appropriate sections ofthe

Massachusetts General Laws and to 225 C.M.R. 9.03. The future cost ofimplementation

is estimated at $10,000, which includes marketing ofthe new standard and public

notification of all Commonwealth, consumer, market, and industry stakeholders. The

total cost of $24,000 is an initial, non-recurring expense, as summarized in Table 17.

Compliance with the standard is expected to come at little to no future cost to the

Commonwealth. In states that have adopted appliance efficiency standards, including the

Commonwealth, compliance is required through manufacturer self-certification.

However, these requirements will not burden manufacturers, because high-efficiency

7 Infmmation provided by the Commonwealth's Department ofHousing and Community Development.

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
furnaces are already being manufactured, tested and supplied for sale in the

Commonwealth. In cases where enforcement of compliance may be required, the cost of

enforcement is expected to be ofthe same order ofmagnitude, that is, a few thousand

dollars8

.

Table 17. Estimated One-time Cost ofthe Standard

Labor, Overhead & Incidentals (per hour) $ 200

Activity Hours Expense

Legal Research and Form ulation 30 $ 6,000

Development and Prom ulgation 40 -$ 8,000

Public Notification and Marketing - $ 10,000

Total $ 24,000

Inclusive of promulgation, implementation and possible enforcement, the cost of

the standard for 95% penetration is significantly lower than the cost of non-regulatory

alternatives for the 75, 85 or 95% level of penetration.

5. Conclusions

5.1 Summary ofAnalysis

The time and cost requirements ofthe five non-regulatory alternatives are

compared in Table 18. The eventual cost requirement for each alternative is a function of

the historical success rate ofinfluence ofthe marketing efforts ofthe program and the

average annual cost ofthe program. For a 95% level ofmarket penetration, the range of

costs is $2.99 million to $57.67 million over a period of 6 to 63 years.

Table 18. Estimated Time and Cost Requirements for Non-regulato1y Alternatives

Gas Networks Heat Loan Tax Relief HEARTWAP ReS J MassSAVE

Success Rate = 37% 7% 11% 3% 9%

Penetration Expected Estimated Expected Estimated Expected Estimated Expected Estimated Expected Estimated

Level Time Additional Cost Time Additional Cost Time Additional Cost Time Additional Cost Time Additional Cost

(%) (years) ($) Iyears) ($) (years) ($) (years) ($) (years) ($)

75% 1 1,832,773 4 665,196 3 498,897 10 9,154,630 4 4,503,340

85% 3 5,498,319 12 1,995,588 8 1,330,392 27 24,717,501 9 10,132,515

95% 6 10,996,638 27 4,490,073 18 2,993,382 63 57,674,169 21 23,642,535

8 Appliance Standards Awareness Project, American Council for an Energy Efficient Economy (2005,

2009)

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
Ofthe non-regulatory alternatives, the GasNetworks program requires the least

time, 6 years, for 95% penetration because ofits high success rate of37%. The tax

incentive requires the least cost, $2.99 million of all the alternatives compared for a 95%

penetration.

The comparison ofthe non-regulatory alternatives indicates that all the

alternatives represent significant additional time and cost requirements to increase the

desired level ofpenetration. Compared to the very low costs ofimplementing a

regulatory standard that is expected to achieve 95% penetration ofnew NWGF shipments

after the effective compliance date, none ofthe non-regulatory alternatives can be

considered reliable stand-alone policies. The alternative analysis overwhelmingly

indicates that the regulatory standard is the most timely and cost-effective policy to

achieve the desired level ofpenetration.

5.2 Limitations ofthe Analysis

Although the alternative analysis reflects historical cost data and market

penetration trends, the following limitations were experienced in estimating future trends.

The analysis assumes that information diffusion occurs only due to marketing

efforts ofthe programs. In reality, word-ofmouth diffusion plays an important role in

new technology adoption. Because ofthe nature ofthe technology, i.e. the highefficiency NWGF that is not a retail consumer product, it is difficult to make any

assumptions about word ofmouth diffusion in the Commonwealth. However, even if

such an influence were to be included, it cannot be relied upon as a successful influencer

compared to a rebate or tax incentive.

Program cost data are often aggregated across and reported for heating system

equipment and improvements that include not only NWGFs but also boilers, windows,

thermostats, insulation, venting, etc. Wherever available, cost data for only highefficiency NWGFs was used. In cases where a breakdown by equipment was not

available, conservative estimates from the program administrators were obtained.

However, it is likely that detailed cost data for only NWGFs might 'increase the average

annual cost values used, thereby increasing the cost ofthe alternatives.

Success rates for market penetration were estimated from historical data about

total high-efficiency NWGF sales in the Commonwealth. The estimates assume that the

policies do not interact with each other and that there are no synergies between policies,

ifmore than one policy program has been implemented. In reality, the simultaneous

existence ofthe five program alternatives may have led to the high penetration rate of

67% in the Commonwealth. It is likely that the penetration rate may have been much

lower if one or more ofthe programs did not exist. Additionally, the realized success rate

ofthe individual alternatives may be much lower. This reasoning supports the conclusion

ofthe analysis that selecting any ofthe non-regulatory alternatives as a stand-alone

policy over the regulatory standard does not seem to be a reliable approach to achieving

the desired level of penetration in a timely and cost-effective manner.

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001
References

American Council for an Energy Efficient Economy and Appliance Standards Awareness

Project, "Ka-Boom! The Power ofAppliance Standards," (2009).

American Council for an Energy Efficient Economy and Appliance Standards Awareness

Project, "Leading the Way: Continued Opportunities for New State Appliance and

Equipment Efficiency Standards," (2005).

Conservation Services Group, HEAT Loan Statistics provided to MA DOER, 2009.

GasNetworks, Residential High-Efficiency Programs, 2009.

Geroski, P. A. Models ofTechnology Diffusion. Research Policy. 2000. 29: pp. 603-625.

Hall, B. H. and B. Khan. Adoption ofNew Technology. 2003. Department ofEconomics,

University ofCalifornia, Berkeley, CA. Working Paper No. E03-330.

Koomey, J. G., "The Big Mistake" in forecasting technology adoption. Technological

Forecasting and Social Change, 2002.69(2002): pp. 511-518.

Lawrence Berkeley National Laboratory-End-Use Forecasting Group, Analysis ofTax

Creditsfor Efficient Equipment, 2005

Lekvall. P and C. Wahlbin. A Study of Some Assumptions UnderlYing Innovation

Diffusion Functions. Swedish Journal ofEconomics. 1973.75: pp. 362-377.

Massachusetts Department ofRousing and Community Development, HEARTWAP

Statistics provided to MA DOER, 2009.

Massachusetts Department ofPublic Utilities, Energy Efficiency Filings, 2009.

Massachusetts Department ofRevenue, Heating Energy Assistance and Tax Relief

Statistics provided to MA DOER, 2009.

Rufo, M. and Fred Coito., California's Secret Energy Surplus: The Potentialfor Energy

Efficiency., 2002. XENERGY Inc. Oakland, CA. Prepared for The Energy Foundation

and The Hewlett Foundation.

U.S. Department ofEnergy-Office ofEnergy Efficiency and Renewable Energy,

Technical Support Document: Energy Conservation Program for Consumer Products;

Residential Furnaces and Boilers, 2007. Washington, D.C.

U.S. Environmental Protection Agency and U.S. Department ofEnergy, Energy Star

Program, 2009.

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EERE-2009-BT-PET-0024 DOC- ID 1.2.001