CHAPTER 12. MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

12.1 INTRODUCTION ............................................................................................................ 12-1

12.2 METHODOLOGY ........................................................................................................... 12-1

12.2.1 Phase I: Industry Profile........................................................................................ 12-1

12.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide ............................... 12-2

12.2.2.1 Industry Cash-Flow Analysis ................................................................. 12-2

12.2.2.2 Interview Guides .................................................................................... 12-2

12.2.3 Phase III: Subgroup Analysis................................................................................ 12-3

12.2.3.1 Manufacturing Interviews ...................................................................... 12-3

12.2.3.2 Revised Industry Cash-Flow Analysis ................................................... 12-3

12.2.3.3 Manufacturer Subgroup Analysis .......................................................... 12-3

12.2.3.4 Small-Business Manufacturer Subgroup ............................................... 12-4

12.2.3.5 Manufacturing Capacity Impact ............................................................ 12-5

12.2.3.6 Employment Impact ............................................................................... 12-5

12.2.3.7 Cumulative Regulatory Burden ............................................................. 12-5

12.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES ............................................. 12-5

12.3.1 Size Constraints .................................................................................................... 12-5

12.3.2 Alternative Products.............................................................................................. 12-6

12.3.3 Compliance Tolerances ......................................................................................... 12-6

12.3.4 Constrained Innovation and Customization .......................................................... 12-6

12.4 GRIM INPUTS AND ASSUMPTIONS ........................................................................... 12-7

12.4.1 Overview of the GRIM ......................................................................................... 12-7

12.4.2 Sources for GRIM Inputs ...................................................................................... 12-8

12.4.2.1 Prior Energy Conservation Standard Rulemakings ............................... 12-8

12.4.2.2 Shipment Model ..................................................................................... 12-8

12.4.2.3 Engineering Analysis ............................................................................. 12-8

12.4.2.4 Manufacturer Interviews ........................................................................ 12-8

12.4.3 Financial Parameters ............................................................................................. 12-9

12.4.4 Trial Standard Levels ............................................................................................ 12-9

12.4.5 NIA Shipments.................................................................................................... 12-10

12.4.6 Production Costs ................................................................................................. 12-10

12.4.7 Conversion Costs ................................................................................................ 12-11

12.4.7.1 Capital Conversion Costs ..................................................................... 12-12

12.4.7.2 Production Conversion Costs ............................................................... 12-13

12.4.8 Markup Scenarios ............................................................................................... 12-13

12.4.8.1 Preservation of Gross Margin Percentage Scenario ............................. 12-13

12.4.8.2 Preservation of Operating Profit Scenario ........................................... 12-14

12.5 INDUSTRY FINANCIAL IMPACTS ........................................................................... 12-14

12.5.1 Introduction ......................................................................................................... 12-14

12.5.2 SPVU Industry Financial Impacts ...................................................................... 12-15

12.6 IMPACTS ON SMALL BUSINESS MANUFACTURERS .......................................... 12-19

12.7 OTHER IMPACTS ......................................................................................................... 12-21

12-i 
12.7.1 Employment ........................................................................................................ 12-21

12.7.1.1 Employment Impacts ........................................................................... 12-21

12.7.2 Production Capacity ............................................................................................ 12-23

12.7.3 Cumulative Regulatory Burden .......................................................................... 12-23

12.8 CONCLUSION ............................................................................................................... 12-26

REFERENCES ........................................................................................................................ 12-29

LIST OF TABLES

Table 12-1 SBA and NAICS Classification of Small Businesses Potentially Affected by This 

Rulemaking ........................................................................................................ 12-4

Table 12-2 Financial Parameters used for SPVU GRIM ........................................................... 12-9

Table 12-3 Trial Standard Levels for Energy Efficiency Analysis of SPVU Equipment ....... 12-10

Table 12-4 Manufacturer Production Cost Breakdown ($2012) for SPVAC <65 kBtu/h ....... 12-10

Table 12-5 Manufacturer Production Cost Breakdown ($2012) for SPVHP < 65kBtu/h ....... 12-11

Table 12-6 Manufacturer Production Cost Breakdown ($2012) for SPVAC ≥65 kBtu/h and <135 

kBtu/h ............................................................................................................... 12-11

Table 12-7 Manufacturer Production Cost Breakdown ($2012) for SPVHP ≥65 kBtu/h and <135 

kBtu/h ............................................................................................................... 12-11

Table 12-8 Industry Cumulative Capital Conversion Cost ...................................................... 12-12

Table 12-9 Industry Cumulative Product Conversion Cost ..................................................... 12-13

Table 12-10 ASHRAE Baseline: Preservation of Gross Margin Percentage Scenario Changes in 

INPV for SPVU Equipment ............................................................................. 12-16

Table 12-11 ASHRAE Baseline: Preservation of Operating Profit Scenario Changes in INPV for 

SPVU Equipment ............................................................................................. 12-16

Table 12-12 EPCA Baseline: Preservation of Gross Margin Percentage Scenario Changes in 

INPV for SPVU Equipment ............................................................................. 12-17

Table 12-13 EPCA Baseline: Preservation of Operating Profit Scenario Changes in INPV for 

SPVU Equipment ............................................................................................. 12-17

Table 12-14 Potential Changes in the Total Number of SPVU Production Workers in 2019. 12-22

Table 12-15 Lower Bound Direct Employment Factors.......................................................... 12-22

Table 12-16 Compliance Dates and Expected Conversion Expenses of Federal Energy 

Conservation Standards Affecting SPVU Manufacturers................................ 12-25

LIST OF FIGURES

Figure 12-1 Using the GRIM to Calculate Cash Flow ............................................................. 12-7

Figure 12-2 ASHRAE Baseline: Annual Industry Net Cash Flows for SPVU Equipment 

(Preservation of Gross Margin Percentage Markup Scenario) ........................ 12-17

Figure 12-3 ASHRAE Baseline: Annual Industry Net Cash Flows for SPVU Equipment 

(Preservation of Operating Profit Markup Scenario) ....................................... 12-17

Figure 12-4 EPCA Baseline: Annual Industry Net Cash Flows for SPVU Equipment 

(Preservation of Gross Margin Markup Scenario) ........................................... 12-18

Figure 12-5 EPCA Baseline: Annual Industry Net Cash Flows for SPUV Equipment 

(Preservation of Operating Profit Markup Scenario) ....................................... 12-19

12-ii
CHAPTER 12. MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

In determining whether a standard is economically justified, the U.S. Department of 

Energy (DOE) is required to consider the economic impact of the standard on the manufacturers 

and on the consumers of the products subject to such a standard. (42 U.S.C. 6313(a)(6)(B)(i)) 

The law also calls for an assessment of the impact of any lessening of competition as determined 

in writing by the Attorney General. Id. DOE conducted a manufacturer impact analysis (MIA) to 

estimate the financial impact of amended energy conservation standards on manufacturers of 

SPVU equipment, and assessed the impact of such standards on direct employment and 

manufacturing capacity. 

The MIA has both quantitative and qualitative aspects. The quantitative part of the MIA 

primarily relies on the Government Regulatory Impact Model (GRIM), an industry cash-flow 

model adapted for each product in this rulemaking. The GRIM inputs include information on 

industry cost structure, shipments, and pricing strategies. The GRIM’s key output is the industry 

net present value (INPV). The model estimates the financial impact of more-stringent energy 

conservation standards for each product by comparing changes in INPV between a base case and 

the various trial standard levels (TSLs) in the standards case. The qualitative part of the MIA 

addresses product characteristics, manufacturer characteristics, market and product trends, as 

well as the impact of standards on subgroups of manufacturers. 

12.2 METHODOLOGY

DOE conducted the MIA in three phases. Phase I, “Industry Profile,” consisted of 

preparing an industry characterization for the SPVU industry, including data on sales volumes, 

pricing, employment, and financial structure. In Phase II, “Industry Cash Flow,” DOE used the 

GRIM to assess the potential impacts of amended energy conservation standards on 

manufacturers. DOE also developed interview guides to gather information on the potential 

impacts on these manufacturers. In Phase III, “Subgroup Impact Analysis,” DOE interviewed 

manufacturers representing a broad cross-section of the SPVU industry. Using information from 

Phase II, DOE refined its analysis in the GRIM, developed additional analyses for subgroups that 

required special consideration, and incorporated qualitative data from interviews into its analysis.

12.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE prepared a profile of the single package vertical unit air 

conditioner and heat pump industry that built on the market and technology assessment prepared 

for this rulemaking (refer to chapter 3 of the technical support document (TSD)). Before 

initiating the detailed impact studies, DOE collected information on the present and past 

structure and market characteristics of the SPVU industry. This information included shipments, 

manufacturer markups, and the cost structures of various manufacturers. The industry profile 

includes: (1) further detail on the overall market and product characteristics; (2) estimated 

manufacturer market shares; (3) financial parameters such as net plant, property, and equipment; 

selling, general and administrative (SG&A) expenses; cost of goods sold, etc.; and (4) trends in 

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the number of firms, market, and product characteristics. The industry profile included a topdown cost analysis of SPVU equipment manufacturers that DOE used to derive the preliminary 

financial inputs for the GRIM (e.g., revenues, depreciation, SG&A, and research and 

development (R&D) expenses). 

DOE also used public information to further calibrate its initial characterization of the 

industry, including Securities and Exchange Commission (SEC) 10-K reports,1 Standard & 

Poor’s (S&P) stock reports,2 market research tools (i.e., Hoovers3), corporate annual reports, and 

the U.S. Census Bureau’s 2011 Annual Survey of Manufacturers (ASM).

4 DOE also 

characterized these industries using information from its engineering analysis and the life-cycle 

cost analysis.

12.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide 

Phase II focused on the financial impacts of potential amended energy conservation 

standards on manufacturers of SPVU equipment. More-stringent energy conservation standards 

can affect manufacturer cash flows in three distinct ways, as it can: (1) create a need for 

increased investment; (2) raise production costs per unit; and (3) alter revenue due to higher perunit prices and/or possible changes in sales volumes. To quantify these impacts, DOE used the 

GRIM to perform a cash-flow analysis for the SPVU industry. In performing these analyses, 

DOE used the financial values derived during Phase I and the shipment scenarios used in the 

national impact analysis (NIA). In Phase II, DOE performed these preliminary industry cashflow analyses and prepared written guides for manufacturer interviews. 

12.2.2.1 Industry Cash-Flow Analysis 

The GRIM uses several factors to determine a series of annual cash flows from the 

announcement year of amended energy conservation standards until 30 years after the standards’ 

compliance date. These factors include annual expected revenues, costs of goods sold, SG&A, 

taxes, and capital expenditures related to the amended standards. Inputs to the GRIM include 

manufacturer production costs, markup assumptions, and shipments forecasts developed in other 

analyses. DOE derived the manufacturing costs from the engineering analysis and information 

provided by the industry. It estimated typical manufacturer markups from public financial reports 

and interviews with manufacturers. DOE developed alternative markup scenarios for each GRIM 

based on discussions with manufacturers. DOE’s shipments analysis, presented in chapter 9 of 

the TSD, provided the basis for the shipment projections in the GRIM. The financial parameters 

were developed using publicly available manufacturer data and were revised with information 

submitted confidentially during manufacturer interviews. The GRIM results are compared to 

base-case projections for the industry. The financial impact of amended energy conservation 

standards is the difference between the discounted annual cash flows in the base case and 

standards case at each TSL.

12.2.2.2 Interview Guides

During Phase II of the MIA, DOE interviewed manufacturers to gather information on 

the effects of amended energy conservation standards on revenues and finances, direct 

employment, capital assets, and industry competitiveness. Before the interviews, DOE 

12-2 
distributed an interview guide to interviewees. The interview guide provided a starting point for 

identifying relevant issues and impacts of amended energy conservation standards on individual 

manufacturers or subgroups of manufacturers. Most of the information received from these 

meetings is protected by non-disclosure agreements and resides with DOE’s contractors. The 

MIA interview topics included (1) key issues to this rulemaking; (2) company overview and 

organizational characteristics; (3) manufacturer markups and profitability; (4) distribution 

channels; (5) shipment projections and market shares; (6) product mix; (7) financial parameters; 

(8) conversion costs; (9) cumulative regulatory burden; (10) direct employment impact 

assessment; (11) exports, foreign competition, and outsourcing; (12) consolidation; and (13) 

impacts on small businesses.

12.2.3 Phase III: Subgroup Analysis

For its GRIM analysis, DOE presented the impacts on all equipment classes of SPVU as 

a whole. DOE sought to obtain feedback from industry on the approaches used in the GRIM and 

to isolate key issues and concerns. During interviews, DOE defined one manufacturer subgroup, 

small manufacturers, that could be disproportionately impacted by amended energy conservation 

standards. 

12.2.3.1 Manufacturing Interviews

The information gathered in Phase I and the cash-flow analysis performed in Phase II are 

supplemented with information gathered from manufacturer interviews in Phase III. The 

interview process provides an opportunity for manufacturers to express their views on important 

issues privately, allowing confidential or sensitive information to be considered in the 

rulemaking process. DOE sought to obtain feedback from industry on the approaches used in the 

GRIMs and to isolate key issues and concerns. 

DOE used these interviews to tailor the GRIM to reflect financial characteristics unique 

to the SPVU industry. Interviews were scheduled well in advance to provide every opportunity 

for key individuals to be available for comment. Although a written response to the questionnaire 

was acceptable, DOE sought interactive interviews, which help clarify responses and identify 

additional issues. The resulting information provides valuable inputs to the GRIM developed for 

the equipment classes.

12.2.3.2 Revised Industry Cash-Flow Analysis 

In Phase II of the MIA, DOE provided manufacturers with preliminary GRIM input 

financial figures for review and evaluation. During the interviews, DOE requested comments on 

the values it selected for the parameters. DOE revised its industry cash-flow model based on this 

feedback. Section 12.4.3 provides more information on how DOE calculated the parameters.

12.2.3.3 Manufacturer Subgroup Analysis 

Using average cost assumptions to develop an industry cash-flow estimate may not 

adequately assess differential impacts of amended energy conservation standards among 

manufacturer subgroups. For example, small manufacturers, niche players, or manufacturers 

exhibiting a cost structure that largely differs from the industry average could be more negatively 

12-3 
affected. To address this possible impact, DOE used the results of the industry characterization 

analysis in Phase I to group manufacturers that exhibit similar characteristics. 

During the interviews, DOE discussed the potential subgroups and subgroup members it 

identified for the analysis. DOE asked manufacturers and other interested parties to suggest what 

subgroups or characteristics are the most appropriate to analyze. As described in section 12.2.3, 

DOE presents the industry impacts on SPVU equipment manufacturers as a whole because most 

of the equipment classes represent the same market served by the same manufacturers. However, 

as discussed below, DOE identified one manufacturer subgroup that warranted a separate impact 

analysis: small manufacturers.

12.2.3.4 Small-Business Manufacturer Subgroup

DOE investigated whether small business manufacturers should be analyzed as a 

manufacturer subgroup. DOE used the Small Business Administration (SBA) small business size 

standards effective on November 5, 2010, as amended, and the North American Industry 

Classification System (NAICS) code, presented in Table 12-1, to determine whether any small 

entities would be affected by the rulemaking.5 For the equipment classes under review, the SBA 

bases its small business definition on the total number of employees for a business, its 

subsidiaries, and its parent companies. An aggregated business entity with fewer employees than 

the listed limit is considered a small business.

Table 12-1 SBA and NAICS Classification of Small Businesses Potentially Affected by This 

Rulemaking

Industry Description Revenue Limit Employee Limit NAICS

Air-Conditioning and Warm Air Heating 

Equipment and Commercial and Industrial 

Refrigeration Equipment Manufacturing

N/A 750 333415

DOE used publicly available and proprietary information to identify potential small 

manufacturers. DOE’s research involved industry trade association membership directories 

(including American Heating and Refrigeration Institute (AHRI) and North American 

Association of Food Equipment Manufacturers (NAFEM), product databases (e.g., AHRI 

Directory, NSF International listings, the SBA Database), individual company websites, and 

market research tools (e.g., Hoovers.com) to create a list of companies that manufacture or sell 

equipment covered by this rulemaking. DOE also asked stakeholders and industry 

representatives if they were aware of any other small manufacturers during manufacturer 

interviews and at previous DOE public meetings. DOE screened out companies that did not offer 

equipment covered by this rulemaking, did not meet the definition of a “small business,” or are 

foreign owned and operated. 

Based on this analysis, DOE identified one small business manufacturer of SPVU 

equipment. DOE reports the potential impact of this rulemaking on the small manufacturer in 

section 12.6. 

12-4 
12.2.3.5 Manufacturing Capacity Impact 

One significant outcome of amended energy conservation standards could be the 

obsolescence of existing manufacturing assets, including tooling and investment. The 

manufacturer interview guides have a series of questions to help identify impacts of amended 

standards on manufacturing capacity, specifically capacity utilization and plant location 

decisions in the United States, with and without amended standards; the ability of manufacturers 

to upgrade or remodel existing facilities to accommodate the new requirements; the nature and 

value of any stranded assets; and estimates for any one-time changes to existing plant, property, 

and equipment (PPE). DOE’s estimates of the one-time capital changes and stranded assets affect 

the cash flow estimates in the GRIM. These estimates can be found in section 12.4.8. DOE’s 

discussion of the capacity impact can be found in section 12.7.2. 

12.2.3.6 Employment Impact 

The impact of amended energy conservation standards on employment is an important 

consideration in the rulemaking process. To assess how domestic direct employment patterns 

might be affected, the interviews explored current employment trends in the SPVU industry. The 

interviews also solicited manufacturer views on changes in employment patterns that may result 

from more stringent standards. The employment impacts section of the interview guide focused 

on current employment levels associated with manufacturers at each production facility, 

expected future employment levels with and without amended energy conservation standards, 

and differences in workforce skills and issues related to the retraining of employees. The 

employment impacts are reported in section 12.7.1. 

12.2.3.7 Cumulative Regulatory Burden

DOE seeks to mitigate the overlapping effects on manufacturers due to amended energy 

conservation standards and other regulatory actions affecting the same products. DOE analyzed 

the impact on manufacturers of multiple, product-specific regulatory actions. Based on its own 

research and discussions with manufacturers, DOE identified regulations relevant to SPVU

equipment, such as State regulations and other Federal regulations that impact other products 

made by the same manufacturers. Discussion of the cumulative regulatory burden can be found 

in section 12.7.3. 

12.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES

Each MIA interview starts by asking: “What are the key issues for your company 

regarding the energy conservation standard rulemaking?” This question prompts manufacturers 

to identify the issues they feel DOE should explore and discuss further during the interview. The 

following sections describe the most significant issues identified by manufacturers. These 

summaries are provided in aggregate to protect manufacturer confidentiality. 

12.3.1 Size Constraints

Manufacturers noted that higher efficiency standards could force them to increase the size 

of their products to levels that are not acceptable to their customers. The manufacturers stated 

that some critical design options, such as increasing the amount of heat exchanger surface area, 

12-5 
would necessitate an increase in cabinet size and footprint that would be unacceptable to their 

customers. For example, in the modular classroom and modular office markets, any additional 

floor space taken up by a larger SPVU could not be used by students and tenants. In the telecom 

market, manufacturers noted that telecom operators have standard-sized telecom shelters and 

current SPVU designs already make use of all available wall space. Any increase in size would 

force their customers to redesign the layout of the shelters and the complex telecommunications 

electronics that are housed in the shelters. These size constraints would affect manufacturers if 

the amended standards are increased beyond the levels proposed in the March 16, 2011 draft of 

ASHRAE’s Proposed Addendum i to Standard 90.1-2010. 

According to manufacturers, a change in cabinet size would be particularly problematic 

in the replacement market. Amended designs may no longer physically fit into existing 

installation locations. Some examples include units that are too wide to fit through standard 

width doorways, that are too tall for the standard ceiling heights, and that protrude too far into 

classrooms or offices. Aside from the physical space constraints, manufacturers are concerned 

that air vents and wall plenums would no longer align. The use of sleeves or adaptors to reroute 

air flow would be unsightly, take up valuable space, and affect air flow in a manner that reduces 

product efficiency. 

12.3.2 Alternative Products 

Multiple manufacturers stated that a large increase in efficiency could lead to price 

increases that would cause their customers to consider alternative products, such as unitary 

systems or commercial roof top units. They noted that these systems are often less convenient for 

end-users due to the need for extensive duct work, the use of long refrigerant lines, and/or the 

reduced ability to control the flow of fresh air. These manufacturers were concerned that an 

increase in the energy conservation standard would raise the SPVU prices to the point where 

end-users would accept the drawbacks of alternative products. DOE did not receive any 

quantitative comments on the price point at which unitary systems and commercial systems 

typically become cost-competitive alternatives.

12.3.3 Compliance Tolerances

Two manufacturers stated concerns about the tolerances required by compliance testing. 

They noted that SPVU manufacturers have no control over the variability in the performance of 

purchased components, such as compressors, or the variability of instrumentation within 

different test laboratories. As a result, the manufacturers stated that it is unrealistic for DOE to 

expect their products could test within the narrow confidence limits set by the 10 CFR 429.43. 

12.3.4 Constrained Innovation and Customization 

Multiple manufacturers noted that complying with an increased energy conservation 

standard would draw time, resources, and focus away from innovation, customization, and 

customer responsiveness. Manufacturers believe that the design, engineering, and testing 

resources used to comply with an amended standard would be better invested in developing 

features requested by their customers. Furthermore, multiple manufacturers noted that higher 

standards push manufacturers toward similar designs. Manufacturers stated that standards 

12-6 
constrain their ability to customize products in ways that maximize efficiency based on the end 

user’s specific use-case. 

12.4 GRIM INPUTS AND ASSUMPTIONS

The GRIM serves as the main tool for assessing the impacts on industry due to amended 

energy conservation standards. DOE relies on several sources to obtain inputs for the GRIM. 

Data and assumptions from these sources are then fed into an accounting model that calculates 

the industry cash flow both with and without amended energy conservation standards. 

12.4.1 Overview of the GRIM

The basic structure of the GRIM, illustrated in Figure 1, is an annual cash flow analysis 

that uses manufacturer prices, manufacturing costs, shipments, and industry financial 

information as inputs, and accepts a set of regulatory conditions such as changes in costs, 

investments, and associated margins. The GRIM spreadsheet uses a number of inputs to arrive at 

a series of annual cash flows, beginning with the base year of the analysis, 2014, and continuing 

to 2048. The model calculates the INPV by summing the stream of annual discounted cash flows 

during this period and adding a discounted terminal value.6

Figure 12-1 Using the GRIM to Calculate Cash Flow 

The GRIM projects cash flows using standard accounting principles and compares 

changes in INPV between the base-case scenario and the standard-case scenario induced by 

amended energy conservation standards. The difference in INPV between the base case and the 

standard case(s) represents the estimated financial impact of the amended energy conservation 

standard on manufacturers. Appendix 12A provides more technical details and user information 

for the GRIM.

DOE presents MIA results relative to a base case that uses efficiency levels specified by 

ASHRAE Standard 90.1-2013 as the baseline efficiencies for SPVU equipment. Consequently, 

when comparing the INPV impacts of the GRIM model, the baseline efficiency is greater than 

the current Federal minimum efficiency requirements. 

For this TSD, DOE also repeats the INPV and cash flow calculations relative to an 

alternative base case, where the baseline efficiency levels are equal lot the current Federal 

12-7 
minimums, which were set in 2009. (74 FR 12058). This alternative scenario is referred to as the 

“EPCA Baseline”.

12.4.2 Sources for GRIM Inputs

The GRIM uses several different sources for data inputs in determining industry cash 

flow. These sources include prior company profiles, census data, rulemaking financial metrics, 

the shipments model, the engineering analysis, and the manufacturer interviews.

12.4.2.1 Prior Energy Conservation Standard Rulemakings

DOE used industry reviewed financial metrics from prior air conditioning and heat pump 

product rulemakings to estimate draft industry financial values, such as tax rate, working capital, 

SG&A spending, R&D spending, depreciation, capital expenditures, and net PPE, when no 

reliable data was publicly available. Specifically, DOE based draft financial metrics off the 2011 

direct final rule for Residential Furnaces, Central Air Conditioners and Heat Pumps (76 FR 

37408) and the 2008 final rule for Packaged Terminal Air Conditioners and Heat Pumps (73 FR 

58772). The draft financial metrics were then revised based on manufacturer feedback during 

interviews.

12.4.2.2 Shipment Model

The GRIM used shipment projections derived from DOE’s shipments model in the NIA. 

Chapter 9 of the TSD describes the methodology and analytical model DOE used to forecast 

shipments. 

12.4.2.3 Engineering Analysis 

The engineering analysis establishes the relationship between manufacturer selling price 

(MSP) and energy efficiency for the equipment covered in this rulemaking. DOE adopted a 

design option approach to develop cost-efficiency curves in its engineering analysis. DOE began 

its analysis by conducting industry research to select equipment classes to directly analyze, 

develop baseline unit specifications, and select representative SPVU equipment for further 

analysis. Next, DOE determined efficiency levels based on the design options applicable to the 

specific equipment studied and the maximum technologically feasible efficiency level for each 

equipment class modeled. To develop cost estimates, DOE conducted a price analysis, based 

upon physical teardowns of selected units, cost estimates from publicly available sources, and 

price quotes from manufacturers. DOE then developed a cost model to determine manufacturer 

production costs (MPCs). By applying derived manufacturer markups to the MPC, DOE 

calculated the MSP and constructed industry cost-efficiency curves. See Chapter 5 for a 

complete discussion of the engineering analysis. 

12.4.2.4 Manufacturer Interviews

During the course of the MIA, DOE conducted interviews with a representative crosssection of manufacturers. DOE also interviewed manufacturers representing a significant portion 

of sales in every equipment class. During these discussions, DOE obtained information to 

determine and verify GRIM input assumptions in each industry. Key topics discussed during the 

12-8 
interviews and reflected in the GRIM include:

• capital conversion costs (one-time investments in PPE);

• financial metrics;

• product conversion costs (one-time investments in research, product development, 

testing, and marketing);

• product cost structure, or the portion of the MPCs related to materials, labor, 

overhead, and depreciation costs; 

• MPCs estimated in the engineering analysis; and

• possible profitability impacts.

12.4.3 Financial Parameters

Given the very limited number of public companies in the SPVU industry, DOE was not 

able to apply its standard methodology of determining initial GRIM financial input based on 

SEC filings and public documents. While there are two public companies producing SPVU 

equipment, SPVU sales account for less than 1% of the companies’ revenues. In reviewing their 

financials, DOE did not find their corporate financial metrics in line with prior values related to 

air conditioners and heat pumps. DOE instead relied on prior final rule financial metrics, which 

had been reviewed and commented on by air conditioner and heat pump manufacturers, as draft 

values. During interviews, manufacturers were asked to provide their own figures for the 

parameters listed in Table 12-2. Where applicable, DOE adjusted the parameters in the GRIM 

using manufacturer feedback and market share information. 

Table 12-2 Financial Parameters used for SPVU GRIM

Parameter Value

Tax Rate 

(% of Taxable Income) 35.5% 

Working Capital

(% of Revenue) 20.1% 

SG&A 

(% of Revenue) 14.1%

R&D 

(% of Revenues) 1.6%

Depreciation 

(% of Revenues) 1.0% 

Capital Expenditures 

(% of Revenues) 1.4% 

Cost of Capital 10.4%

12.4.4 Trial Standard Levels 

DOE developed a number of efficiency levels for each type of equipment class. TSLs 

were then developed by selecting likely groupings of efficiency levels for all equipment types. 

Table 12-3 presents the TSLs used for energy efficiency analysis in the GRIM.

12-9 
Table 12-3 Trial Standard Levels for Energy Efficiency Analysis of SPVU Equipment

Equipment Class Baseline TSL1 TSL2 TSL3 TSL4

SPVAC < 65 kBtu/h 10.0 10.5 11.0 11.75 12.3

SPVHP < 65 kBtu/h 10.0/ 3.0 10.5/ 3.2 11.0/ 3.3 11.75/ 3.9 12.3/ 3.9

65 < SPVAC < 135 kBtu/h 10.0 10.0 10.0 10.0 10.0

65 < SPVHP < 135 kBtu/h 10.0/ 3.0 10.0/ 3.0 10.0/ 3.0 10.0/ 3.0 10.0/ 3.0

12.4.5 NIA Shipments

The GRIM estimates manufacturer revenues based on total-unit-shipment forecasts and 

the distribution of these values by efficiency level. Changes in the efficiency mix at each 

standard level are a key driver of manufacturer finances. For this analysis, the GRIM applied the 

NIA shipments forecasts. 

As part of the shipments analysis, DOE estimated the base-case shipment distribution by 

efficiency level for each equipment class. In the standards case, DOE determined efficiency 

distributions for cases in which a potential standard applies for 2019 and beyond. DOE assumed 

that all shipments in the base case that did not meet the standard under consideration would meet 

the new standard in 2019 under a roll-up scenario. Consumers in the base case who purchase 

units above the standard level are not affected as they are assumed to continue to purchase the 

same base-case unit in the standards case. See chapter 9 of the TSD for more information on the 

SPVU equipment standards-case shipments. 

12.4.6 Production Costs 

Changes in production costs affect revenues and gross profits. Products that are more 

efficient typically cost more to produce than baseline products (as shown in chapter 5 of the 

TSD). For the MIA, DOE used the MPCs derived in the engineering analysis. 

Manufacturing a higher efficiency product is typically more expensive than 

manufacturing a baseline product. MPCs increase at higher efficiency levels due to the use of 

more complex components, which are more costly than baseline components. These changes in 

MPC can affect the revenues, gross margins, and cash flow of the industry, making these product 

cost data key GRIM inputs for DOE’s analysis. 

To calculate baseline MSP, DOE followed a three-step process. First, DOE derived 

MPCs from the engineering and teardown analyses. Second, DOE applied a manufacturer 

markup, which varies with the markup scenario (discussed in detail in section 12.4.8), to the 

MPCs. The engineering analysis also provided shipping costs, but in the case of SPVU 

equipment, shipping was not included in the MSP. 

Table 12-4 through Table 12-7 show the production cost estimates used in the GRIM for 

each analyzed equipment class.

Table 12-4 Manufacturer Production Cost Breakdown ($2012) for SPVAC <65 kBtu/h 

Efficiency 

Level Materials Labor Depreciation Overhead MPC Shipping Markup MSP

9.00 $924.17 $148.28 $14.71 $62.30 $1,149.47 $46.04 1.28 $1,517.36

12-10
10.00 $1,169.19 $168.04 $18.23 $68.64 $1,424.10 $67.74 1.28 $1,890.59

10.50 $1,230.08 $173.17 $19.11 $70.46 $1,492.81 $67.74 1.28 $1,978.54

11.00 $1,291.39 $178.01 $19.99 $72.14 $1,561.53 $67.74 1.28 $2,066.50

11.75 $1,478.44 $190.77 $22.61 $74.54 $1,766.36 $88.78 1.28 $2,349.72

12.30 $1,800.14 $232.28 $27.53 $90.76 $2,150.71 $123.96 1.28 $2,876.87

Table 12-5 Manufacturer Production Cost Breakdown ($2012) for SPVHP < 65kBtu/h

Efficiency 

Level Materials Labor Depreciation Overhead MPC Shipping Markup MSP

9.00 $1,018.14 $161.11 $16.90 $124.40 $1,320.55 $46.04 1.28 $1,736.34

10.00 $1,263.04 $183.24 $20.94 $168.84 $1,636.06 $67.74 1.28 $2,161.90

10.50 $1,349.71 $188.65 $21.95 $154.69 $1,715.00 $67.74 1.28 $2,262.94

11.00 $1,433.36 $193.75 $22.96 $143.87 $1,793.94 $67.74 1.28 $2,363.98

11.75 $1,621.38 $206.98 $25.97 $174.92 $2,029.26 $88.78 1.28 $2,686.23

12.30 $1,974.19 $252.02 $31.63 $212.98 $2,470.82 $123.96 1.28 $3,286.61

Table 12-6 Manufacturer Production Cost Breakdown ($2012) for SPVAC ≥65 kBtu/h and 

<135 kBtu/h 

Efficiency 

Level Materials Labor Depreciation Overhead MPC Shipping Markup MSP

8.90 $1,158.87 $178.87 $19.24 $146.10 $1,503.07 $70.45 1.28 $1,994.38

10.00 $1,455.00 $205.43 $24.12 $200.16 $1,884.72 $70.45 1.28 $2,482.89

Table 12-7 Manufacturer Production Cost Breakdown ($2012) for SPVHP ≥65 kBtu/h and 

<135 kBtu/h 

Efficiency 

Level Materials Labor Depreciation Overhead MPC Shipping Markup MSP

8.90 $1,331.35 $193.40 $22.10 $179.93 $1,726.78 $70.45 1.28 $2,280.73

10.00 $1,671.57 $223.02 $27.72 $242.94 $2,165.24 $70.45 1.28 $2,841.96

12.4.7 Conversion Costs 

Amended energy conservation standards typically cause manufacturers to incur one-time 

conversion costs to bring their production facilities and product designs into compliance with 

new regulations. For the MIA, DOE classified these one-time conversion costs into two major 

groups: capital conversion costs and product conversion costs. Capital conversion costs are onetime investments in plant, property, and equipment to adapt or change existing production 

facilities in order to fabricate and assemble new product designs that comply with amended 

energy conservation standards. Product conversion costs are one-time investments in research, 

development, testing, marketing and other costs to make product designs comply with amended 

energy conservation standards. DOE based its estimates of the conversion costs for each 

12-11
efficiency level on information obtained from manufacturer interviews and the design pathways 

analyzed in the engineering analysis. 

12.4.7.1 Capital Conversion Costs 

To evaluate the level of capital conversion expenditures manufacturers would likely incur 

to comply with energy conservation standards, DOE used the manufacturer interviews to gather 

data on the level of capital investment required at each efficiency level. DOE validated 

manufacturer comments through estimates of capital expenditure requirements derived from the 

product teardown analysis and engineering model described in chapter 5 of the TSD.

Table 12-8 Industry Cumulative Capital Conversion Cost

TSL Capital Conversion Cost

($ millions)

TSL 1 2.4

TSL 2 2.4

TSL 3 2.9

TSL 4 11.0

At TSL 1, the engineering analysis suggests that manufactures will increase the size of 

heat exchangers by inserting an additional coil row to meet the 10.5 EER standards for SPVUs 

less than 65,000 Btu/h. DOE expects capital conversion costs of $2.4 million. Some 

manufacturers stated that they would need to build additional lab space to accommodate a 

standard that required extensive redesign and testing of product lines. The investment in new inhouse test capability accounts for expected capital conversion costs of up to $2.4 million for the 

industry. 

At TSL 2, the engineering analysis suggests that manufacturers would add two coil rows 

beyond the baseline heat exchanger design to meet the 11 EER standards for SPVUs less than 

65,000 Btu/h. DOE does not expect any growth in cabinet size would be required for most 

models. Similar to TSL 1, manufacturers stated that the driver of capital expenditures would be 

the need for additional lab space to accommodate the testing of new products. DOE expects 

capital conversion costs to remain at $2.4 million at TSL 2. 

At TSL 3, DOE expects manufacturers to increase heat exchanger face size to meet the 

11.75 EER standards for SPVUs less than 65,000 Btu/h. 97 percent of models listed in the AHRI 

directory require redesign at TSL 3. Manufacturers would likely need to increase cabinet size to 

accommodate the larger heat exchanger and add a more efficient 2-stage compressor. The design 

changes increase capital conversion costs to $2.9 million at this level. 

At TSL 4, DOE expects manufacturers to add an additional condensed heat exchanger to 

their original heat exchangers to meet the 12.3 EER standards for SPVUs less than 65,000 Btu/h. 

This change would require deeper product cabinets and the setup of a production line to product 

secondary heat exchangers. Almost all of the models listed in the AHRI directory require 

redesign at TSL 4. The extensive product line redesigns increase capital conversion costs to 

$11.0 million at this level.

12-12
12.4.7.2 Production Conversion Costs 

DOE assessed the equipment conversion costs at each level by integrating data from 

quantitative and qualitative sources. DOE considered feedback regarding the potential costs of 

each efficiency level from multiple manufacturers to determine conversion costs such as R&D 

expenditures and certification costs. Manufacturer numbers were aggregated to better reflect the 

industry as a whole and to protect confidential information. 

Based on both manufacturer feedback and the engineering analysis, many design options 

were considered to be component swaps, which required substitutions of new components but 

did not require product redesigns. Lighting changes, fan motor substitutions, compressor 

upgrades, and night curtain retrofits were understood to not require significant product 

development investments. However, changes in evaporator coil, condenser coil, and insulation 

were modeled to incur development expenses. Additionally, DOE included the cost of industry 

certifications in the product conversion costs. 

Table 12-9 Industry Cumulative Product Conversion Cost

TSL Product Conversion Cost 

($ millions)

TSL 1 4.1

TSL 2 4.8

TSL 3 13.2

TSL 4 22.8

Product conversion costs for SPVUs were primarily derived from manufacturer value 

provided during confidential interviews. The conversion costs are driven by engineering and 

testing requirements. As the standard increases, increasing levels of engineering effort is required 

to meet the efficiency requirements more product models require redesign. Manufacturers noted 

a large jump in the complexity of changes and the number of product lines that would require 

redesign at TSL 3. This is reflected in the product conversion costs. At TSL 4, product 

conversion cost increase dramatically as nearly all manufacturers would have to develop an 

entirely new platform to meet this standard.

12.4.8 Markup Scenarios

DOE used multiple standards case markup scenarios to represent the uncertainty about 

the impacts of energy conservation standards on prices and profitability. In the base case, DOE 

used the same markups applied in the engineering analysis. In the standards case, DOE modeled

two markup scenarios to represent the uncertainty about the potential impacts on prices and 

profitability following the implementation of amended energy conservation standards: (1) a 

preservation of gross margin percentage scenario and (2) a preservation of operating profit

scenario. These scenarios lead to different markups values that, when applied to the inputted 

MPCs, result in varying revenue and cash flow impacts. 

12.4.8.1 Preservation of Gross Margin Percentage Scenario

Under the preservation-of-gross-margin-percentage scenario, DOE applied a single 

uniform “gross margin percentage” markup across all efficiency levels. As production costs 

12-13
increase with efficiency, this scenario implies that the absolute dollar markup will increase as 

well. DOE assumed the non-production cost markup—which includes SG&A expenses, R&D 

expenses, interest, and profit— to be 1.28 for the SPVU industry. This markup is consistent with 

the one DOE assumed in the engineering analysis. Manufacturers indicated that it is optimistic to 

assume that, as their MPCs increase in response to an energy conservation standard, they would 

be able to maintain the same gross margin percentage markup. Therefore, DOE assumes that this 

scenario represents a high bound to industry profitability under an energy conservation standard. 

12.4.8.2 Preservation of Operating Profit Scenario

During interviews, multiple manufacturers expressed concern that the higher production 

costs could harm profitability. Because of market characteristics, several manufacturers 

suggested that the additional costs of higher minimum efficiency products could not be fully 

passed through to customers. Incorporating this feedback, DOE modeled the preservation of 

operating profit scenario.

In the preservation of operating profit scenario, manufacturer markups are set so that 

operating profit one year after the compliance date of the new energy conservation standards is 

the same as in the base case. Under this scenario, as the cost of production and the cost of sales 

go up, manufacturers are generally required to reduce their markups to a level that maintains 

base-case operating profit. The implicit assumption behind this markup scenario is that the 

industry can only maintain only its operating profit in absolute dollars after the standard. 

Operating margin in percentage terms is squeezed (reduced) between the base case and standards 

case.

12.5 INDUSTRY FINANCIAL IMPACTS

Using the inputs and scenarios described in the previous sections, the GRIM estimated 

indicators of financial impacts on the SPVU industry. The following sections detail additional 

inputs and assumptions for SPVU equipment. The main results of the MIA are also reported in 

this section. The MIA consists of two key financial metrics: INPV and annual cash flows. 

12.5.1 Introduction

The INPV measures the industry value and is used in the MIA to compare the economic 

impacts of different TSLs in the standards case. The INPV is different from DOE’s net present 

value, which is applied to the U.S. economy. The INPV is the sum of all net cash flows 

discounted at the industry’s cost of capital or discount rate. The GRIM for this rulemaking 

estimates cash flows from 2014 to 2048, the same analysis period used in the NIA (chapter 10 of 

the TSD). This timeframe models both the short-term impacts on the industry from the base year

of the analysis until the compliance date (2014 – 2019) and a long-term assessment over the 30-

year analysis period used in the NIA (2019 – 2048).

In the MIA, DOE compares the INPV of the base case to that of each TSL in the 

standards case. The difference between the base-case and a standards-case INPV is an estimate 

of the economic impacts that implementing that particular TSL would have on the industry. In 

the NOPR Notice, DOE presents MIA results relative to a base case that uses efficiency levels 

specified by ASHRAE Standard 90.1-2013 as the baseline efficiencies for SPVU equipment.

12-14
Consequently, when comparing the INPV impacts of the GRIM model, the baseline efficiency is 

greater than the current Federal minimum efficiency requirements. 

In analyzing the financial impacts in this TSD, DOE also presents the INPV and cash 

flow calculations relative to an alternative base case, where the baseline efficiency levels are 

equal to the current Federal minimums, which were set in 2009. (74 FR 12058). This alternative 

scenario is referred to as the “EPCA Baseline”.

While INPV is useful for evaluating the long-term effects of amended energy 

conservation standards, short-term changes in cash flow are also important indicators of the 

industry’s financial situation. For example, a large investment over 1 or 2 years could strain the 

industry’s access to capital. Consequently, the sharp drop in financial performance could cause 

investors to flee, even though recovery may be possible. Thus, a short-term disturbance can have 

long-term effects that the INPV cannot capture. To provide an idea of the behavior of annual net 

cash flows, Figure 12 through Figure 12-5 present the annual net cash flows from 2013 through 

2049. 

Annual cash flows are discounted to 2014. After the standards announcement date (i.e., 

the publication date of the final rule), industry cash flows begin to decline as companies use their 

financial resources to prepare for the amended energy conservation standard. Cash flows 

between the announcement date and the compliance date are driven by the level of conversion 

costs and the proportion of these investments spent every year. The more stringent the amended 

energy conservation standard, the greater the impact on industry cash flows in the years leading 

up to the compliance date, as product conversion costs lower cash inflows from operations and 

capital conversion costs increase cash outflows for capital expenditures. 

Free cash flow in the year the amended energy conservation standards take effect is 

driven by two competing factors. In addition to capital and product conversion costs, amended 

energy conservation standards could create stranded assets, i.e., tooling and equipment that could 

have been used longer if the energy conservation standard had not made them obsolete. In this 

year, manufacturers write down the remaining book value of existing tooling and equipment 

whose value is affected by the amended energy conservation standard. This one-time write-down 

acts as a tax shield that alleviates decreases in cash flow from operations in the year of the writedown. In this year, there is also an increase in working capital that reduces cash flow from 

operations. A large increase in working capital is needed due to more costly production 

components and materials, higher inventory carrying to sell more expensive products, and higher 

accounts receivable for more expensive products. Depending on these two competing factors, 

cash flow can be either positively or negatively affected in the year the standard takes effect. 

12.5.2 SPVU Industry Financial Impacts

Table 12-11 and Table 12-11 present the INPV estimates for the two markup scenarios. 

Figure 12 and Figure 12-3 present the net annual cash flows for the two markup scenarios. These 

results are based on an ASHRAE baseline and are consistent with the results presented in the 

NOPR Notice.

12-15
Table 12-10 ASHRAE Baseline: Preservation of Gross Margin Percentage Scenario 

Changes in INPV for SPVU Equipment

Units

Base 

Case

Trial Standard Level

1 2 3 4

INPV 2013 $ M 36.5 34.2 38.0 49.2 47.4

Change 

in INPV

2013 $ M - (2.3) 1.5 12.7 10.9

(%) - (6.3) 4.1 34.9 29.9

Table 12-11 ASHRAE Baseline: Preservation of Operating Profit Scenario Changes in 

INPV for SPVU Equipment

Units

Base 

Case

Trial Standard Level

1 2 3 4

INPV 2013 $ M 36.5 32.4 33.2 27.5 3.0

Change 

in INPV

2013 $ M - (4.1) (3.3) (9.0) (33.4) 

(%) - (11.3) (9.0) (24.7) (91.7) 

($15.0)

($10.0)

($5.0)

$0.0

$5.0

$10.0

$15.0

2013 $ Millions

Base Case TSL 1 TSL 2 TSL 3 TSL 4

12-16
Figure 12-2 ASHRAE Baseline: Annual Industry Net Cash Flows for SPVU Equipment

(Preservation of Gross Margin Percentage Markup Scenario) 

Figure 12-3 ASHRAE Baseline: Annual Industry Net Cash Flows for SPVU Equipment

(Preservation of Operating Profit Markup Scenario)

The following tables present alternative results based on the EPCA Baseline. Table 12-12 and 

Table 12-13 present the INPV estimates for the two markup scenarios relative that EPCA 

Baseline. Figure 12-4 and Figure 12-5present the net annual cash flows for the two markup 

scenarios under the alternative baseline. 

Table 12-12 EPCA Baseline: Preservation of Gross Margin Percentage Scenario Changes 

in INPV for SPVU Equipment 

Units

Base 

Case

Trial Standard Level

1 2 3 4

INPV 2013 $ 

M 33.9 36.4 40.2 51.4 48.8

Change 

in INPV

2013 $ 

M - 2.5 6.3 17.5 14.9

(%) - 7.5 18.6 51.8 44.0

Table 12-13 EPCA Baseline: Preservation of Operating Profit Scenario Changes in INPV 

for SPVU Equipment

($14.0)

($12.0)

($10.0)

($8.0)

($6.0)

($4.0)

($2.0)

$0.0

$2.0

$4.0

$6.0

$8.0

2013 $ Millions

Base Case TSL 1 TSL 2 TSL 3 TSL 4

12-17
Units

Base 

Case

Trial Standard Level

1 2 3 4

INPV 2013 $ 

M 33.9 23.4 24.0 20.8 (8.4) 

Change 

in INPV

2013 $ 

M - (10.4) (9.9) (13.1) (42.3) 

(%) - (30.8) (29.2) (38.7) (124.8) 

Figure 12-4 EPCA Baseline: Annual Industry Net Cash Flows for SPVU Equipment 

(Preservation of Gross Margin Markup Scenario)

 $(15.00)

 $(10.00)

 $(5.00)

 $-

 $5.00

 $10.00

 $15.00

2013 $ Million

Base Case TSL 1 TSL 2 TSL 3 TSL 4

12-18
Figure 12-5 EPCA Baseline: Annual Industry Net Cash Flows for SPUV Equipment 

(Preservation of Operating Profit Markup Scenario) 

12.6 IMPACTS ON SMALL BUSINESS MANUFACTURERS

DOE conducted a more focused inquiry of the companies that could be small business 

manufacturers of products covered by this rulemaking. For “Air-Conditioning and Warm Air 

Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing,” 

the SBA has set a size threshold of 750 employees or less for an entity to be considered as a 

small business for this category. During its market survey, DOE used all available public 

information to identify potential small manufacturers. DOE’s research involved industry trade 

association membership directories (e.g. AHRI), product databases (e.g., Federal Trade 

Commission (FTC) and ENERGY STAR® databases), individual company websites, and market 

research tools (e.g., Hoovers reports) to create a comprehensive list of companies that 

manufacture or sell products covered by this rulemaking. DOE also asked stakeholders and 

industry representatives if they were aware of any other small manufacturers during 

manufacturer interviews and at previous DOE public meetings. DOE reviewed publicly available 

data and contacted select companies on its list, as necessary, to determine whether they met the 

SBA’s definition of a small business manufacturer of covered SPVU equipment. DOE screened 

out companies that did not offer products covered by this rulemaking, did not meet the definition 

of a “small business,” or are foreign owned and operated.

DOE identified seven companies that produce equipment covered under the single 

package vertical unit energy conservation standard rulemaking. Two of the seven companies are 

foreign-owned and operated. Of the remaining five businesses, two companies met the SBA 

definition of a “small business.” One small business manufacturer has the largest market share 

of any manufacturer in the SPVU industry and 48 percent of the active listings in the AHRI 

 $(20.00)

 $(15.00)

 $(10.00)

 $(5.00)

 $-

 $5.00

 $10.00

2013 $ Millions

Base Case TSL 1 TSL 2 TSL 3 TSL 4

12-19
Directory.[1] The other has a more modest market share and 5 percent of active listings in the 

AHRI Directory.

At the time of analysis, the domestic small manufacturer with the large market share had 

229 active listings. Fifty-four of those listings, or 24 percent, would meet the proposed 

standards. The other 76 percent of the listings would not meet the proposed standard. The small 

manufacturer would need to either redesign those products or drop those products and move their 

customers to more-efficient offerings. However, DOE notes that the small manufacturer had 

more product listings than any other manufacturer that could meet the proposed standard. 

The domestic small manufacturer with the smaller market share had 27 active 

listings. None of those listings would meet the proposed standards. At the proposed standard 

level, this manufacturer would need to redesign its entire product offering or leave the SPVU 

market. 

If small manufacturers chose to redesign their products that do not meet the proposed 

standard, they would need to make capital conversion and product conversion investments. DOE 

estimated an average total conversion cost of $1.49 million per manufacturer. DOE expects this 

investment, which is roughly 12% of an average manufacturer’s annual revenue, to be made over 

the four-year period between the publication of the final rule and the effective date of the 

standard. Since small businesses may have a greater difficulty obtaining credit or may obtain 

less favorable terms than larger businesses, the small manufacturers may face higher overall 

costs if they choose to finance the conversion costs resulting from the change in standard. 

DOE notes that the small manufacturer with the larger market share produces more 

SPVU units than its larger competitors. The company could potentially spread the conversion 

costs over a larger number of units than its competitors. However, the small manufacturer did 

express concern in MIA interviews that such an effort would tie up their available engineering 

resources and prevent them from focusing on technology advancements and customer-driven 

feature requests. Larger manufacturers, which do not have the same shipment volumes as the 

small manufacturer, may have fewer engineers dedicated to SPVU equipment but potentially 

could marshal engineering and testing resources across their organization. The concern about 

adequate availability of engineering resources would also likely apply to the small manufacturer 

with the smaller market share.

Smaller manufacturers generally pay higher prices for purchased parts, such as BPMs, 

relative to larger competitors. Even the small manufacturer with the larger market share, and the 

highest number of SPVU shipments of any manufacturer in the industry, could pay higher prices 

for component than the larger competition. If their competitors have centralized sourcing, those 

companies could combine component purchases for SPVU product lines with purchases for other 

non-SPVU product lines and obtain higher volume discounts than those available to small 

manufacturers.

[1] Based on model listings in the AHRI directory accessed on June 6, 2012 (Available 

at: http://www.ahridirectory.org/ahridirectory/pages/ac/defaultSearch.aspx). 

12-20

 
Based on DOE’s analysis, including interviews with manufacturers, the Department 

believes one of the identified small businesses would be able to meet the proposed 

standard. That small manufacturer has the strong market share, technical expertise, and the 

production capability to meet the amended standard. The company successfully competes in 

both the current baseline-efficiency and premium-efficiency market segments. The other small 

business has significantly less market share and does not compete in the premium-efficiency 

market today. Given the lack of existing product that meets the standard, potential conversion 

costs, and disadvantages in financing costs as well as in pricing for sourced components, the 

second small business may face headwinds in meeting the proposed standard. 

12.7 OTHER IMPACTS 

12.7.1 Employment

To quantitatively assess the impacts of energy conservation standards on employment, 

DOE used the GRIM to estimate the domestic labor expenditures and number of employees in 

the base case and at each TSL from 2014 through 2048. DOE used statistical data from the U.S. 

Census Bureau’s 2011 ASM, the results of the engineering analysis, and interviews with 

manufacturers to determine the inputs necessary to calculate industry-wide labor expenditures 

and domestic employment levels. Labor expenditures related to manufacturing of the product are 

a function of the labor intensity of the product, the sales volume, and an assumption that wages 

remain fixed in real terms over time. The total labor expenditures in each year are calculated by 

multiplying the MPCs by the labor percentage of MPCs. 

The total labor expenditures in the GRIM were then converted to domestic production 

employment levels by dividing production labor expenditures by the annual payment per 

production worker (production worker hours times the labor rate found in the U.S. Census 

Bureau’s 2011 ASM). The estimates of production workers in this section cover workers, 

including line-supervisors who are directly involved in fabricating and assembling a product 

within the original equipment manufacturer (OEM) facility. Workers performing services that 

are closely associated with production operations, such as materials handling tasks using 

forklifts, are also included as production labor. DOE’s estimates only account for production 

workers who manufacture the specific products covered by this rulemaking.

12.7.1.1 Employment Impacts

Using the GRIM, DOE estimates in the absence of new energy conservation standards, 

there would be 412 domestic production workers for SPVU equipment. DOE estimates that 95 

percent of SPVU units sold in the United States are manufactured domestically. Table 12-15

shows the range of the impacts of potential amended energy conservation standards on U.S. 

production workers. 

12-21
Table 12-14 Potential Changes in the Total Number of SPVU Production Workers in 2019

Trial Standard Level

Base Case 1 2 3 4

Total Number of Domestic 

Production Workers in 2019 

(without changes in 

production locations)

412 421 432 461 559

Potential Changes in 

Domestic Production 

Workers in 2019*

− (21) to 

9 

(21) to 

20

(66) to 

49

(115) to 

147

*DOE presents a range of potential employment impacts, where the lower bound represents the scenario in which 

some domestic manufacturers move production to other countries.

The employment impacts shown in Table 12-14 represent the potential production 

employment that could result following the compliance date of amended energy conservation 

standards. The upper end of the results in the table estimates the maximum increase in the 

number of production workers after the implementation of new energy conservation standards 

and it assumes that manufacturers would continue to produce the same scope of covered products 

within the United States. The upper end of the range also assumes that domestic production does 

not shift to countries with lower labor costs. The lower end of the range indicates the total 

number of U.S. production workers in the industry who could lose their jobs if all existing 

production were moved outside of the United States. The lower end of the range represents the 

maximum decrease to the total number of U.S. production workers in the industry due to 

manufacturers choosing to leave the industry or due to moving production to other countries. 

Table 12-15 shows the employment factors used to estimate the lower bound 

employment. The employment factor is the largest portion of manufacturers that could choose to 

leave the industry. 

Table 12-15 Lower Bound Direct Employment Factors

TSL 1 2 3 4 

Lower Bound Employment 

Factor 5% 5% 16% 28% 

To estimate a lower bound employment factor at TSL 1 and TSL 2, DOE assumes that all 

manufacturers with less than 5% market share would leave the industry. At TSL 3, DOE assumes 

all manufacturers with less than 10% market share leave the industry. And at TSL 4, DOE 

assumes all manufacturers with less than 25% market share would leave the industry. The 

employment impacts shown are independent of the employment impacts from the broader U.S. 

economy, which are documented in the Employment Impact Analysis, chapter 13 of the TSD. 

Although the methodology presents a wide range of potential impacts, information 

provided by the engineering analysis and by manufacturers indicates that potential amended 

standards would have a relatively small impact on domestic employment. For TSL 1 through 

12-22
TSL 4, the available design options identified in the engineering analysis consist of increasing 

the size of the heat exchanger, increasing the size of the cabinet to accommodate the large heat 

exchanger, and swapping motors for the indoor blower. While these changes may require some 

reconfiguration of production lines, they do not dramatically alter the number of man-hours 

required to produce a SPVU unit once the production lines are running. The lower bound of the 

direct employment analysis models the impact if companies exit the industry. Under this worst 

case scenario for the TSL proposed, TSL 2, domestic direct employment drops by 21 workers. 

12.7.2 Production Capacity 

According to SPVU manufacturers interviewed, demand for SPVUs, which roughly 

correlates to trends in telecommunications spending and construction of new schools, peaked in 

the 2001-2006 timeframe. As a result, excess capacity exists in the industry today. 

Redesigns of SPVU models as a result of an energy conservation standard would not 

fundamentally change the assembly of the equipment. Bottlenecks are more likely to come from 

the redesign, testing, and certification process rather than from production capacity. To that end, 

some interviewed manufacturers expressed concern that the redesign of all products to include 

BPM motors would require a significant portion of their engineering resources, taking resources 

away from customer responsiveness and R&D efforts. Furthermore, some manufacturers noted 

that an amended standard requiring BPMs would monopolize their testing resources and facilities 

– to their point when some manufacturers anticipated the need to build new psychrometric test 

labs just to have enough in-house testing capacity to meet the amended standard. Once all 

products have been redesigned to meet an amended energy conservation standard, manufacturers 

did not anticipate any production constraints. 

12.7.3 Cumulative Regulatory Burden 

While any one regulation may not impose a significant burden on manufacturers, the 

combined effects of several impending regulations may have serious consequences for some 

manufacturers, groups of manufacturers, or an entire industry. Assessing the impact of a single 

regulation may overlook this cumulative regulatory burden. For the cumulative regulatory 

burden analysis, DOE looks at other significant product-specific regulations that could affect 

SPVU equipment manufacturers that will take effect 3 years before or after the compliance date 

of amended energy conservation standards for these productsa

. In addition to the amended energy 

conservation regulations on SPVU equipment, several other Federal regulations apply to these 

products and other equipment produced by the same manufacturers. 

 For equipment with proposed standards that are more stringent than those 

contained in ASHRAE Standard 90.1-2013, the compliance date is four years after publication of 

an energy conservation standards final rule (i.e., compliance date assumed to be 2019 for the 

purposes of MIA). For equipment with proposed standards that are set at the levels contained in 

a The compliance date for SPVU equipment is proposed to be in the year 2017. 

12-23

 
ASHRAE Standard 90.1-2013, the compliance date is two or three years after the effective date 

of the requirements in ASHRAE Standard 90.1-2013, depending on equipment size (i.e., 2015 or 

2016). For this cumulative regulatory burden analysis, DOE considered regulations that could 

affect SPVU manufacturers that take effect from 2012 to 2022, to account for the range of 

compliance years.

In interviews, manufacturers cited Federal regulations on equipment other than SPVUs 

that contribute to their cumulative regulatory burden. In particular, manufacturers noted that 

some of them also produce residential central air conditioners and heat pumps, residential 

furnaces, room air conditioners, and water-heating equipment. These products have amended 

energy conservation standards that go into effect within three years of the compliance date for 

any amended SPVU standards. The compliance years and expected industry conversion costs 

are listed below:

12-24
Table 12-16 Compliance Dates and Expected Conversion Expenses of Federal Energy 

Conservation Standards Affecting SPVU Manufacturers

Federal Energy Conservation 

Standards

Approximate Compliance 

Date

Estimated Total Industry 

Conversion Expense

2008 Packaged Terminal Air 

Conditioners and Heat Pumps

73 FR 58772 (Oct. 7, 2008)

2012 $33.7M (2007$)

2011 Room Air Conditioners

76 FR 22454 (April 21, 2011);

76 FR 52854 (August 24, 2011)

2014 $171M (2009$)

2007 Residential Furnaces & Boilers

72 FR 65136 (Nov. 19, 2007) 2015 $88M (2006$)*

2011 Residential Furnaces

76 FR 37408 (June 27, 2011);

76 FR 67037 (Oct. 31, 2011)

2015 $2.5M (2009$)**

2011 Residential Central Air 

Conditioners and Heat Pumps

76 FR 37408 (June 27, 2011);

76 FR 67037 (Oct. 31, 2011)

2015 $ 26.0M (2009$)**

2010 Gas Fired and Electric Storage 

Water Heaters

75 FR 20112 (April 16, 2010)

2015 $95.4M (2009$)

Walk-in Coolers and Freezers

79 FR 32050 (June 3, 2014) 2017 $33.6M (2012$)

Dishwashers*** 2018 TBD

Commercial Warm-Air Furnaces*** 2018 TBD

Commercial Packaged Air 

Conditioners and Heat Pumps***

79 FR 58948 (September 18, 2014)

2019 $226.4M (2013$)

Furnace Fans

79 FR 38130 (July 3, 2014) 2019 $40.6M (2013$)

Packaged Terminal Air Conditioners 

and Heat Pumps***

79 FR 55538 (September 16, 2014)

2019 $14.3M (2013$)

Miscellaneous Residential 

Refrigeration*** 2019 TBD

Commercial Water Heaters*** 2019 TBD

Commercial Packaged Boilers*** 2020 TBD

Residential Water Heaters*** 2021 TBD

Clothes Dryers*** 2022 TBD

Central Air Conditioners*** 2022 TBD

Room Air Conditioners*** 2022 TBD

* Conversion expenses for manufacturers of oil-fired furnaces and gas-fired and oil-fired boilers associated with the 

November 2007 final rule for residential furnaces and boilers are excluded from this figure. The 2011 direct final 

rule for residential furnaces sets a higher standard and earlier compliance date for oil-fired furnaces than the 2007 

final rule. As a result, manufacturers will be required design to the 2011 direct final rule standard. The conversion 

costs associated with the 2011 direct final rule are listed separately in this table. EISA 2007 legislated higher 

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standards and earlier compliance dates for residential boilers than were in the November 2007 final rule. As a result, 

gas-fired and oil-fired boiler manufacturers were required to design to the EISA 2007 standard beginning in 2012. 

The conversion costs listed for residential gas-fired and oil-fired boilers in the November 2007 residential furnaces 

and boilers final rule analysis are not included in this figure.

**Estimated industry conversion expense and approximate compliance date reflect a court-ordered April 24, 2014 

remand of the residential non-weatherized and mobile home gas furnaces standards set in the 2011 Energy 

Conservation Standards for Residential Furnaces and Residential Central Air Conditioners and Heat Pumps. The 

costs associated with this rule reflect implementation of the amended standards for the remaining furnace product 

classes (i.e., oil-fired furnaces).

***The final rule for this energy conservation standard has not been published. The compliance date and analysis of 

conversion costs have not been finalized at this time. (If a value is provided for total industry conversion expense, 

this value represents an estimate from the NOPR.)

Some stakeholders have expressed concern regarding potential conflicts with other 

certification programs, in particular EPA ENERGY STAR requirements. DOE realizes that the 

cumulative effect of several regulations on an industry may significantly increase the burden 

faced by manufacturers who need to comply with multiple certification programs from different 

organizations and levels of government. However, the Department does not consider ENERGY 

STAR in its presentation of cumulative regulatory burden, because ENERGY STAR is a 

voluntary program and is not Federally mandated. 

Some stakeholders also noted that The Clean Air Act has historically affected their 

products. The Clean Air Act defines the EPA's responsibilities for protecting and improving the 

nation's air quality and the stratospheric ozone layer. For SPVU manufacturers, the most 

significant of these additional regulations are the EPA mandated phase-out of 

hydrochlorofluorocarbons (HCFCs). The Act demands on a quarterly basis that any person who 

produced, imported, or exported certain ozone-depleting substances, including HCFC 

refrigerants, must report the amount produced, imported and exported. Additionally, effective 

January 1, 2015, selling, manufacturing, and using any ozone-depleting such substance is banned 

unless such substance has been used, recovered, and recycled; is used and entirely consumed in 

the production of other chemicals; or is used as a refrigerant in appliances manufactured prior to 

January 1, 2020. Finally, production phase-outs will continue until January 1, 2030 when such 

production will be illegal. For HCFC-22, which is commonly used in older A/C equipment, EPA 

regulations make it illegal to manufacture a new appliance using virgin HCFC-22 refrigerant or 

pre-charge any appliance or appliance component with HCFC-22 as of January 1, 2010. 

Additionally, HCFC-22 production will stop by January 1, 2020. These bans could trigger design 

changes to low global warming potential continue to encourage transition to non-ozone-depleting 

refrigerants.

12.8 CONCLUSION

The following section summarizes the impacts for the scenarios DOE believes are most 

likely to capture the range of impacts on SPVU equipment manufacturers as a result of amended 

energy conservation standards. DOE also notes that while these scenarios bound the range of 

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most plausible impacts on manufacturers, there potentially could be circumstances that cause 

manufacturers to experience impacts outside of this range. 

At TSL 1, the standard for all equipment classes with capacity less than 65,000 Btu/h is 

set at 10.5 EER / 3.2 COP. The standard for all equipment classes with capacity greater than or 

equal to 65,000 Btu/h and less than 135,000 Btu/h and greater than or equal to 135,000 Btu/h and 

less than 240,000 Btu/h is set at the baseline (i.e., 10.0 EER/3.0 COP). DOE estimates the 

change in INPV to range from -$2.3 million to -$4.1, or a change of -6.3 percent to -11.3 percent. 

At this level, free cash flow is estimated to decrease to $0.6 million, or a decrease of 78.2 percent 

compared to the base-case value of $2.9 million in the year 2018. DOE does expect a standard at 

this level to require changes to manufacturing equipment, thereby resulting in capital conversion 

costs. The engineering analysis suggests that manufacturers would reach this amended standard 

by increasing heat exchanger size. Roughly sixty-five percent of the SPVU models listed in the 

AHRI Directory would need to be updated to meet this amended standard level. Estimated 

industry conversion costs total $6.5 million. 

 At TSL 2, the standard for all equipment classes with capacity less than 65,000 

Btu/h is set at 11.0 EER / 3.3 COP. The standards for all equipment classes with capacity greater 

than or equal to 65,000 Btu/h and less than 135,000 Btu/h and greater than or equal to 135,000 

Btu/h and less than 240,000 Btu/h remain at baseline as in TSL 1. DOE estimates impacts on 

INPV to range from $1.5 million to -$3.3 million, or a change in INPV of 4.1 percent to -9.0 

percent. At this level, free cash flow is estimated to decrease to $0.4, or a change of -85.0 percent 

compared to the base-case value of $2.9 million in the year 2018. Based on the engineering 

analysis, DOE expects manufacturers to reach this level of efficiency by further increasing the 

size of the heat exchanger. Roughly seventy-six percent of the SPVU models listed in the AHRI 

Directory would need to be updated to meet this amended standard level. Product updates and 

associated testing expenses would further increase conversion costs for the industry to $7.2 

million. 

At TSL 3, the standard increases to 11.75 EER / 3.9 COP for equipment with capacity 

less than 65,000 Btu/h. The standards for SPVAC and SPVHP equipment with capacity greater 

than or equal to 65,000 Btu/h and less than 135,000 Btu/h and greater than or equal to 135,000 

Btu/h and less than 240,000 Btu/h remain at baseline as in TSLs 1 and 2. DOE estimates impacts 

on INPV to range from $12.7 million to -$9.0 million, or a change in INPV of 34.9 percent to -

24.7 percent. At this level, free cash flow is estimated to decrease to less than zero, to -$2.1 

million, or a change of -174.0 percent compared to the base-case value of $2.9 million in the year 

2018. The engineering analysis suggests that manufacturers would reach this amended standard 

by once again increasing heat exchanger size and by switching to more-efficient two-stage 

compressors. Manufacturers that produce heat exchangers in-house may need to add coil 

fabrication equipment to accommodate the size of the heat exchanger necessary to meet the 

standard. Additionally, the new heat exchanger size may require manufacturers to invest 

additional capital into their sheet metal bending lines. Ninety-four percent of the SPVU models 

listed in the AHRI Directory would require redesign at this amended standard level. DOE 

estimates total conversion costs to be $16.1 million for the industry. 

At TSL 4, the standard increases to 12.3 EER / COP of 3.9 for SPVAC and SPVHP 

equipment with capacity less than 65,000 Btu/h. The standards for SPVAC and SPVHP 

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equipment with capacity greater than or equal to 65,000 Btu/h and less than 135,000 Btu/h and 

greater than or equal to 135,000 Btu/h and less than 240,000 Btu/h remain at baseline as in TSLs 

1, 2, and 3. DOE estimates impacts on INPV to range from $10.9 million to -$33.4 million, or a 

change in INPV of 29.9 percent to -91.7 percent. At this level, free cash flow is estimated to 

decrease to -$9.5 million, or a decrease of 428.2 percent compared to the base-case value of $2.9 

million in the year 2018. TSL 4 represents the max-tech standard level. DOE expects 

manufacturers to meet the amended standard by dramatically increasing the size of the 

evaporating heat exchanger and incorporating two condensing heat exchangers. Virtually all 

SPVU models listed in the AHRI Directory would require redesign at this amended standard 

level. Additionally, DOE expects designs to use BPMs for both the indoor and outdoor motors. 

Total conversion costs are expected to reach $33.9 million for the industry. 

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