17

- i CHAPTER 17

. REGULATORY IMPACT ANALYSIS

TABLE OF CONTENTS

17.1 INTRODUCTION

................................ ................................ ................................ ... 17

- 1

17.2 NON

- REGULATORY POLICIES

................................ ................................ .......... 1 7

- 2

17.2.1 Methodology

................................ ................................ ................................ ............ 17

- 2

17.2.2 Assumptions Regarding Non

- Regulatory Policies

................................ .................. 17

- 3

17.2.3 Policy Interactions

................................ ................................ ................................ ... 17

- 4

17.3 NON

- REGULATORY POLICY AS SUMPTIONS

................................ ................ 17

- 4

17.3.1 No New Regulatory Action

................................ ................................ ..................... 17

- 5

17.3.2 Consumer Rebates

................................ ................................ ................................ ... 17

- 5

17.3.2.1 Methodology

................................ ................................ .......................... 17

- 5

17.3.2.2 Analysis

................................ ................................ ................................ .. 17

- 6

17.3.3 Consumer Tax Credits

................................ ................................ ........................... 17

- 11

17.3.4 Manufacturer Tax Credits

................................ ................................ ...................... 17

- 13

17.3.5 Voluntary Energy Efficiency Targets

................................ ................................ .... 17

- 14

17.3.6 Early Replacement

................................ ................................ ................................ . 17

- 15

17.3.7 Bulk Government Purchases

................................ ................................ .................. 17

- 15

17.4 IMPACTS OF NON

- REGULATORY ALTERNATI VES

................................ ... 17

- 17

LIST OF TABLES

Table 17.1.1 Non

- Regulatory Alternatives to National Standards

................................ ...... 17

- 1
Table 17.2.1 Efficiency Levels in Proposed Standard Levels for Central Air Conditioners and Heat Pumps and Furnaces

................................ .................. 17

- 4
Table 17.3.1 Benefit/Cost Ratios Without and With Rebates for Gas Furnaces, CAC and HP in Selected Regions (2009$)

................................ .............................. 17

- 7
Table 17.3.2 Marke t Penetrations in 2016 Without and With Rebates for Gas Furnaces, CAC and HP in Selected Regions

................................ ................ 17

- 11
Table 17.3.3 Market Penetrat ions in 2016 Attributable to Consumer Tax Credits for Gas Furnaces, CAC and HP in Selected Regions

................................ ......... 17

- 12
Table 17.3.4 Market Penetr ations in 2016 Attributable to Manufacturer Tax Credits for Gas Furnaces, CAC and HP in Selected Regions

................................ ... 17

- 14
Table 17.4.1 Impacts of Non

- Regulatory Alternatives for Non

- Weatherized Gas Furnaces in All Regions that Meet the Proposed Standard (TSL 4)

............. 17

- 20
Table 17.4.2 Impacts of Non

- Regulatory Alternatives for Split System Air Conditioners in All Regions that Meet the Proposed Standard (TSL 4)

...... 17

- 20
Table 17.4.3 Impacts of Non

- Regulatory Alternatives for Split System Heat Pumps in All Regions that Meet the Proposed Standard (TSL 4)

................................ 17

- 21
Table 17.4.4 Impacts of Non

- Regulatory Alternatives for Non

- Weatherized Gas Furnaces in the North Region that Meet the Proposed Standard (TSL 4)

.... 17

- 2117

- ii Table 17.4.5 Impacts of Non

- Regulatory Alternatives for Split System Air
Conditioners in the Hot

- Humid Region that Meet the Proposed Standard (TSL 4)

................................ ................................ ................................ .......... 17

- 22
Table 17.4.6 Impacts of Non

- Regulatory Alternatives for Split System Heat Pumps in
the Hot

- Humid Region that Meet the Proposed Standard (TSL 4)

............... 17

- 22

LIST OF FIGURES

Figure 17.3.1 Market Penetration Curve for Non

- Weatherized Gas Furnaces, North Region

................................ ................................ ................................ ............. 17

- 8 Figure 17.3.2 Market Penetration Curve for Split System Air Conditioners, Hot

Humid Region

................................ ................................ ................................ . 17

- 9 Figure 17.3.3 Market Penetration Curve for Split System Heat Pumps, Hot

- Humid Region

................................ ................................ ................................ ........... 17

- 10 Figure 17.4.1 Market Penetration of Non

- Weatherized Gas Furnaces in the North Region Meeting the Target Level in Policy Cases

................................ ....... 17

- 18 Figure 17.4.2 Market Penetration of Split System Air Conditioners in the Hot

- Humid Region Meeting the Target Level in Policy Cases

................................ ....... 17

- 18 Figure 17.4.3 Market Penetration of Split System Heat Pumps in the Hot

- Humid Region Meeting the Target Level in Policy Cases

................................ ....... 17

- 1917

- 1 CHAPTER 17. REGULATORY IMPACT AN ALYSIS

17.1 INTRODUCTION

The U.S. Department of Energy (DOE) has determined that energy conservation
standards for residential and commercial consumers of furnaces and central air conditioners and heat pumps constitute an “economically significant regulatory action” under Executiv e Order (E.O.) 12866

, Regulatory Planning and Review. 58 FR 51735, Volume 58, No. 190, page 51735. (October 4, 1993). Under 10 CFR part 430, subpart C, appendix A, section III.12, DOE committed to evaluating non

- regulatory alternatives to proposed standard s by performing a regulatory impact analysis (RIA). 61 FR 36981, Volume 61, No. 136, page 36978. ( November 15, 1996)

. This RIA, which DOE has prepared pursuant to E.O. 12866 , evaluates potential non

regulatory alternatives, comparing the costs and benefits of each to those of the proposed
standard s. 58 FR 51735, page 51741. As noted in E.O. 12866, t his RIA is subject to review by the Office of Management and Budget’s Office of Information and Regulatory Affairs. 58 FR 51735, page 51740.

For this RIA , DOE used integrated National Impact Analysis ( NIA )

- RIA integrated
model s built on the NIA model s discussed in chapter 10 for its analysis. DOE studied the impacts of the non

- regulatory policies on three representative product classes in the residential

sector : non

- weatherized gas furnaces (NWGF)

, split system air conditioners (SAC)

, and split system heat pumps (SHP)

. DOE studied the impacts of the RIA policies on only the se residential product classes.

DOE identified six non

- regulatory policy alternatives tha t possibly could provide
incentives for the same energy efficiency levels as the proposed standard s for the products that are the subject of this rulemaking. The non

- regulatory policy alternatives are listed in Table

17 .1.1. DOE evaluated each alternative in terms of its ability to achieve significant energy savings at a reasonable cost, and compared the effectiveness of each to the effectiveness of the proposed standard

.

Table 17.1.1 Non

- Regulatory Alternatives to National Standards

No New Regulatory Action

Consumer Rebates

Consumer Tax Credits

Manufacturer Tax Credits Voluntary Energy Efficiency Targets Early Replacement

Bulk Government Purchases

Sections 17 .2 and 17 .3 discuss the analysis of the six policies listed above. Sections 17 .4
and 17 .5 present the results of the policy alternatives

.17

- 2 17.2 NON

- REGULATORY POLICIES

This section describes the method DOE used to analyze the energy savings and cost
effectiveness of the six non

- regulatory policy alternatives (excluding the alternative of no new regulatory action) for the identified furnaces, central air conditioners

, and heat pumps

. This section also describes the assumptions underlying the analysis.

17.2.1 Methodology

DOE used its integrated NIA

- RIA spreadsheet model s to calculate the national energy savings (NES) and net present value (NPV) associated with each non

- regulatory policy
alternative . Chapter 10 of the technical support document (TSD) describes the NIA spreadsheet models. Appendix 17

- A , section 17

- A .4

, discusse s the new NIA

- RIA integ rated model approach.

DOE quantified the effect of each alternative on the purchase of products that meet target
levels , which are defined as the efficiency levels in the proposed standard s. After establishing the quantitative assumptions underlying each alternative, DOE appropriately revised inputs to the

NIA

- RIA spreadsheet models. The primary model inputs revised were market shares of prod ucts meeting target efficiency levels and equipment replacement rates. The shipments of products for any given year reflect a distribution of efficiency levels. DOE assumed that the proposed
standard s would affect 100 percent of the shipments of products that did not meet target levels in the base case, a whereas the non

- regulatory policies would affect a smaller percen tage of those shipments. DOE made certain assumptions about the percentage of shipments affected by each alternative policy

. DOE used those percentages to calculate the shipment

- weighted average energy consumption and costs of furnaces, CAC

, and HP attribu table to each policy alternative.

Increasing the efficiency of a product often increases its average installed cost. However

, operating costs generally decrease because energy consumption declines. DOE therefore
calculated an NPV for each non

- regulator y alternative in the same way it did for the proposed
standard s. In some scenarios, increases in total installed cost are mitigated by government
rebates or tax credits. Because DOE assumed that consumers would re

- pay credits and rebates in some way (such as additional taxes) , DOE did not include rebates or tax credits as a consumer benefit when calculating national NPV. DOE’s analysis also excluded any administrative costs
for the non

- regulatory policies; including such costs would decrease the NPVs slight ly.

a T he base case for the NIA is a market

- weighted average of units at several efficiency levels.17

- 3 The following are key measures for evaluating the impact of each alternative.

**•** National energy savings, given in quadrillion Btus (quads), describes the cumulative national primary energy savings for products bought during the period from the effective date of the policy (2016 ) through the end of the analysis period ( 2045 ).

**•** Net present value represents the value in 2009$ (discounted to 2010) of net monetary savings from products bought during the period from the effective date of the policy ( 2016 ) through the end of the analysis period ( 2045 ).

**•** DOE calculated the NPV as the difference between the present value of installed equipment cost and operating expenditures in the base case and the present value of
th o se costs in each policy case. DOE calculated operating expenses (including energy

costs ) for the life of the product.

17.2.2 Assumptions Regarding Non

- Regulatory Policies

The effects of non

- regulatory policies are by nature uncertain, because they depend on program implementation

, marketing efforts

, and on consumers’ responses to a program. Because the projected effects depend on assumptions regarding the rate of consumer participation, they are subject to more uncertainty than are the impacts of mandatory standards, which DOE assumes will meet with full compliance. To increase the robustnes s of the analysis, DOE conducted a literature review regarding each non

- regulatory policy and consulted with recognized experts to gather information on similar incentive programs that have been implemented in the United States. By studying experiences wit h the various types of programs, DOE sought to make credible assumptions regarding potential market impacts. Section 17 .3 presents the sources DOE relied on in developing assumptions about each alternative policy and reports DOE’s conclusions as they affec ted the assumptions that underlie the modeling of each policy.

Each non

- regulatory policy that DOE considered would improve the average efficiency
of new furnaces, CAC

, and HP relative to their base case efficiency scenarios (which involve no new regulat ory action). The analysis considered that each alternative policy would induce consumers to purchase units having the same efficiency levels as required by the proposed
standard s (the target levels ). As opposed to the standards case, however, the policy ca ses may not lead to 100 percent market penetration of units that meet target levels.

Table 17 .2. 1 show s the efficiency levels stipulated in the proposed standard s for furnaces and central air conditioners and heat pumps

.17

- 4 Table 17.2.1 Efficiency Levels in Proposed Standard Levels for Central Air Conditioners and Heat Pumps and Furnaces

SCAC SHP NWGF

TSL Region Applicable SEER SEER/HSPF AFUE

4 † Rest of Country a 13 14 / 8.2 80%

North ( Furnace ) 90%

Hot Humid ( AC ) 14 14 / 8.2

Hot Dry ( AC ) 14 /

12.2 & 11.7

EER 14 / 8.2

a The values given under Rest of Country are the national standards, but they effectively apply to the rest of the country not in the regions that have regional standards. Rest of Country refers to Northern region for air conditioners and to Southern region for NWGF and MHF. For OF, the value refers to the Nation.
† Compliance date is 1/1/2015 for central air conditioners and heat pumps and 5/1/2013 for furnaces.
‡ Largest market share unknown; assumed to be equal to the market share for entire Nation.

DOE assumed that the effects of non

- regulatory policies would last from the effective
date of standards

— 2016

— through the end of the analysis period, which is 2045

.

17.2.3 Policy Interactions

DOE calculate d the effects of each non

- regulatory policy separately from those of the other policies. In practice, some policies are most effective when implemented in combination, such as early replacement implemented with consumer rebates, or early replacement implem ented with bulk government purchases. However, DOE attempted to make conservative assumptions to avoid double

- counting policy impacts. The resulting policy impacts are not
additive ; the combined effect of several or all policies cannot be inferred from sum ming their
results.

Section 17

. 4 presents graphs that show the market penetration estimated under each non

regulatory policy for furnaces and central air conditioners and heat pumps

.

17.3 NON

- REGULATORY POLIC Y ASSUMPTIONS

The following subsections describe DOE’s analysis of the impacts of the six non

regulatory policy alternatives to proposed standard s for furnaces and central air conditioners and heat pumps

. (Because the alternative of No New Regulatory Action has no energy or NPV impacts, essentially repr esenting the NIA base case, DOE did not perform any additional analysis for that alternative.) DOE developed estimate s of the market penetration of high

efficiency products both with and without each of the non

- regulatory policy alternatives

.17

- 5 17.3.1 No New Regulatory Action

The case in which no new regulatory action is taken with regard to the energy efficiency
of furnaces and central air conditioners and heat pumps constitutes the base case, as described in

c hapter 10, National Impact Analysis. The base case provides the basis of comparison for all other policies. By definition, no new regulatory action yields zero energy savings and an NPV of
zero dollars.

17.3.2 Consumer Rebates

DOE considered th e scenario in which the Federal government would provide financial
incentives in the form of rebate s to consumers for purchasing energy

- efficient appliances

. This policy provides a consumer rebate for purchasing non

- weatherized ga s furnaces, split system air conditioners, or split system heat pumps that operate at (or above) the same efficiencies as stipulated in proposed standard s (target levels)

17.3.2.1 Methodology

To inform its estimate of the market impacts of consumer rebates, DOE pe rformed a thorough search for existing rebate programs nationwide . It gathered data on utility or agency
rebates for furnaces, air conditione rs, and heat pumps throughout the count ry . DOE also reviewed the current State Energy Efficient Appliance Rebate Program (SEEARP) funded by the American Recovery and Reinvestment Act ( ARRA). 1

, b This program may be considered a combination of a consumer rebate and an early replacement program, with intention to induce appliance sales during the economic recession. DOE analyzed summary material from DOE on

SEEA RP rebates for gas furnaces, central air conditioners, and air source heat pumps

. 2

DOE based its evaluation methodology for consumer rebates on a comprehensive study of California’s potential for achieving energy efficiency . This study, performed by XENERGY,
Inc., c

b DOE provided funding for State

- run rebate programs for consumer purchases of new ENERGY STAR ® qualified home appliances. The resulting SEEARP was implemented beginning in late 2009 by t he 50 States and six U.S. territories, each selecting its own appliances, rebate levels, efficiency levels, appliance recycling requirements, and eligible populations. summarize d experiences with various utility rebate programs. 3 XENE RGY’s analytical
method utilized graphs, or penetration curves , that estimate the market penetration of a technology based on its benefit/cost (B/C) ratio. DOE consulted with experts and reviewed other methods of estimating the effect of consumer rebate programs on the market penetration of efficient technologies. The other methods, developed after the referenced XENERGY report was published, 4

, 5

, 6

, 7

, 8

, 9 used different approaches: other economic parameters (e.g., payback period),
expert surveys, or model calibration based o n specific utility program data rather than multi

utility data

. Some models in use by energy efficiency program evaluation experts were so client

specific that generic relationships between economic parameters and consumer res ponse could

not be establishe d. 7 DOE decided that the most appropriate available method for this RIA

c XENERGY is now owned by KEMA, Inc. ( www.kema.com )17

- 6 analysis was the XENERGY approach of penetration curves based on B/C ratio, which incorporates lifetime operating cost savings

.

XENERGY’s model estimates market impacts induced by financial incentives based on the premise that two types of information diffusion drive the adoption of new technologies.
Internal sources of information encourage consumers to purchase new products primarily through word

- of

- mouth from early adopters. External sources affect consumer purchase decisions through marketing efforts and information from outside the consumer group. Appendix

17

- A , sect ion 17

- A .5 .1 , contains additional details on internal and external information diffusion.

XENERGY’s model equation accounts for the influences of both internal and external sources of information by superimposing the two components. Combining the two mec hanisms for information diffusion, XENERGY’s model generates a set of penetration (or implementation) curves for a measure. XENERGY then calibrated the curves based on participation data from utility rebate programs. The curves illustrate the increased pen etration (i.e., increased market share) of efficient products driven by consumer response to changes in B/C ratio induced by rebate programs. The penetration curves depict various diffusion patterns based on perceived barriers (from no barriers to extremel y high barriers ) to consumer purchase of high

- efficiency products.

DOE adjusted the XENERGY penetration curves based on expert advice founded on more recent utility program experience. 7

, 10 DOE also devised an interpo lation method to create penetration curves based on relationships between the actual base case market penetrations and
actual B/C ratios for each representative product class. Appendix 17

- A , section s 17

- A .5 .2 and

17

- A .5 .3, contain discussion on DOE’s methodology for adjusting and interpolating the curves.

DOE modeled the effects of a consumer rebate policy for furnaces, CAC and HP by determining the increase s in market penetration of products meeting the target level relative to their market penetration s in the base case. It did this using the interpolated penetration curve s created for each representative product class based on the XENERGY methodology to best
reflect the market barrier levels faced by each product class. S ection 17.3.2.1 shows the interpolated curves for the three product classes.

17.3.2.2 Analysis

For the three product classes , DOE estimated the effect of increasing their B/ C ratio s via
a rebate that would pay part or all of the incr eased installed cost of a unit that met the target efficiency level compared to one meeting the baseline ef ficiency l evel

. d

d The baseline technology for each product class is defined in the e ngineering a nalysis , chapter 5 , as the technology that represents the basic characteristics of products in that class

. A baseline unit typically is one that just meets current Federal energy conservation standards and provides basic consumer utility

. DOE based the rebate

amount s on a large sample of utility and agency rebate programs for gas furnaces. DOE gathered17

- 7 data on 159 rebates for gas furnaces, 343 rebates for air conditioners, and 536 rebates for heat pumps initiated by hundred s of utilities or agencies in various States. (Appendix 17

- A, section

17

- A.6

, identifies the rebate programs .) To represent the rebate level for each product class, DOE
used t he simple average of the rebate amounts for units meeting the target levels in th ese sets of programs. DOE assumed that t hese average rebates amounts would apply to models at all efficiency levels at or above the target level for this product class.

DOE assumed th at rebates would remain in effect at the same levels throughout the
fo recast period ( 2016

– 2045 ).

For each product class, DOE first calculated the B/C ratio without a rebate using the difference in total installed costs and lifetime operating cost savings between the unit meeting the target level and the baseline unit. It then calculated the B/C ratio given a rebate for the unit meeting the target efficiency level

. Because the rebate reduced the incremental cost, the unit receiving the rebate had a l arger B/C ratio. Table 17 .3.1 shows the effects of con sumer rebates

on B/C ratios for NWGF for the north region and for SAC and SHP for the hot

- humid region. Appendix 17

- A, section 17

- A.2 , shows the corresponding values for the three product classes for
the other regions. Each B/C ratio value for units with rebates represen ts a weighted average e of the values for the efficiency levels at or above the target level to which the rebate would apply.

Table 17.3.1 Benefit/Cost Ratios Without and W ith Rebates for Gas Furnaces , CAC

and HP in Selected Regions ( 2009$)

Non

Weatherized

Gas Furnaces
, North Region Split System Air

Conditioners , Hot

Humid Region Split System Heat Pump s, Hot

- Humid Region

B/C Ratio W ith out Rebate 3.5 1.8 3.0

Rebate Amount $228 $287 $439

B/C Ratio W ith Rebate 5.5 Inf. Inf.

Calculated Market Barrier C urve No

- Low No No

- Low Inf. = infinite B/C ratio, which occurs when the rebate pays the full incremental cost.

DOE used the se B/C ratios along with the penetration curve s shown in Figures 17 .3.1 through 17 .3. 3 to estimate the percentage of consumers who would purchase furnaces, S AC and

S HP that meet the target levels both with and without a rebate incentive. The curve calculated by DOE to represent the market behavior for NWGF was between t he no barriers and lo w barriers penetration curve. For SAC the curve was closest to the no barriers curve and for SHP the curve

was between the no barriers and low barriers curve s

.

e The weighting factor is the 2016 base case market share of each of the corresponding efficiency levels.17

- 8 Figure 17.3.1 Market Penetration Curve for Non

- Weatherized Gas

Furnaces , North Region 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

0 10 20 30 40 50 60 70 80 90 100Penetration Rate

Benefit/Cost Ratio

No Estimated Low No Rebate With Rebate17

- 9 Figure 17.3.2 Market Penetration Curve for Split System Air Conditioners
, Hot

- Humid Region 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

0 10 20 30 40 50 60 70 80 90 100Penetration Rate

Benefit/Cost Ratio

Low Estimated Moderate No Rebate With Rebate17

- 10 Figure 17.3.3 Market Penetration Curve for Split System Heat Pumps , Hot

Humid Region

For each product class, DOE next estimated the percent increase represented by the change in penetration rate shown on the penetration curve. It then added that percent increase to

t he market share of units that meet the target level in the base case to obtain the market share of units that meet the target level in the rebate case. Table 17.3.2 summarizes the market shares fo r the three product classes in 2016 . DOE used the resulting increase s in market shares as inputs t o represent the policy case scenarios in its NIA

- RIA model. Appendix 17

- A, section 17

- A.3, shows the annual market share increases due to this policy. Section 17 .4 presents the resulting efficiency trends for the policy case of consumer rebates for furnaces, CAC

, and HP. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

0 10 20 30 40 50 60 70 80 90 100Penetration Rate

Benefit/Cost Ratio

No Estimated Low No Rebate With Rebate17

- 11 Table 17.3.2 Market Penetrations in 2016 W ith out and W ith Rebates for Gas Furnaces, CAC and HP in Selected Regions

Non

W eatherized

Gas Furnaces
, North Region % Split System

Air Conditioners,

Hot

- Humid Region % Split System Heat Pumps
, Hot

- Humid Region %

Base

- Case Market Share of Units that Meet Target Levels 71 27 47 Market Share of Units that Meet Target

Levels With Rebate s 78 77 81

Increased Market Share of Units that Meet Target Level With Rebate s 7 49 34

17.3.3 Consumer Tax Credits

DOE estimated the effects of tax credits on consumer purchases based on its previous analysis of consumer participation in tax credits. DOE supported its approach using data from Oregon State’s tax credit program for energy

- efficient appliances. DOE also incorporated previous research that disaggregated the effe ct of rebates and tax credits into a direct price effect

, which deriv es from the savings in purchase price

, and an announcement effect , which is independent of the amount of the incentive

. 11

, 12 The announcement effect derives from the credibility that a technology receives from being included in an incentive program, as well as changes in product marke ting and modifications in markup and pricing. DOE assumed that the rebate and consumer tax credit policies would encompass both dire ct price effect s and
announcement effect s, and that half the increase in market penetration associated with either policy wo uld be due to the direct price effect and ha lf to the announcement effect.

In estimat ing the effects of a tax credit on purchases of consumer products that meet new efficiency standards, DOE assumed the amount of the tax credit s for each product class wou ld be
the same as the corresponding rebate amounts discussed above

.

DOE estimated that fewer consumers would participate in a tax credit program than would take advantage of a rebate. Research has shown that the delay required for a consumer to
receive a tax credit, plus the added time and cost in preparing the tax return, make a tax credit
incentive less effective than a rebate received at the time of purchase. Based on previous analyses, DOE assumed that only 60 percent of the consumers who would take a dvantage of a rebate would take advantage of a tax credit. 13

In preparing its assumptions , DOE also reviewed other tax credit programs that have been
offered at both the Fede ral and State levels for energy

- efficient appliances.

The Energy Policy Act of 2005 (EPACT 2005 ) included Federal tax credits for
consumers who purchase energy

- efficient equipment, including water heaters, furnaces, and17

- 12 furnace fans for new or existing homes. 14 Those tax credits were in effect in 2006 and 2007, expired in 2008, r einstated for 2009

– 2010 by ARRA , and extended by Congress for 2011 with

some modifications

. 1

, 15 DOE reviewed Internal Revenue Service data on the numbers of taxpayers who claimed the tax credits during tax years 2006 and 2007. DOE also reviewed data from an earlier Federal energy conse rvation tax credit program in place in the 1980s. However, DOE did not find data specific enough to furnaces, CAC, or HP to warrant adjusting its analysis method for the Consumer Tax Credits policy case. Appendix 17

- A, section 17

- A.7 .1

, contains
more information on Federal consumer tax credits.

DOE also reviewed its previous analysis on Oregon’s tax credits for clothes washers t o provide support for its assumptions

. 16 In the previous an alysis, DOE compared the market shares

of ultra

- high efficiency (UHE) residential clothes washers in Oregon, which offered both State tax credits and utility rebates, with those in Washington State, which offered only utility rebates during the same period . Based on this analysis, DOE estimated that in Oregon the impact of tax
credits was 62 percent of the impact of rebates for UHE clothes washers having equivalent efficiency. This finding supports its original assumption that participation in a tax credit program would be about 60 percent of participation in a rebate program. Additional discussion of State
tax credits for Oregon and other states is in Appendix 17

- A, section 17

- A.7 .3

.

DOE applied the assumed 60 percent participation described above to the penetration rates estimated for the rebate policy to estimate penetration rates attributable to consumer tax credits. In doing so, DOE incorporated the assumptions for consumer respons e to financial incentives from the penetration curves selected for each product class.

Table 17 .3. 3 summarize s DOE’s assumptions for furnaces, CAC

, and HP r egarding the market penetration of units in 2016 tha t meet target efficiency levels given a consu mer tax credit.

Table 17.3.3 Market Penetrations in 2016 Attributable to Consumer Tax Credits for Gas Furnaces, CAC and HP in Selected Regions

Non

Weatherized Gas Furnaces, North Region
% Split System

Air Conditioners,

Hot

- Humid Region % Split System Heat Pumps,

Hot

- Humid Region %

Base

- Case Market Share of Units that Meet Target Levels 71 27 47 Market Share of Units that Meet Target

Levels With Consumer Tax Credits 75 57 67
Increased Market Share of Units that Meet Target Level With Consumer Tax

Credits 4 30 20

DOE assumed that this policy would transform the market permanently, so that the
increase s in market share s seen in the first year of the program would be maintained throughout17

- 13 the forecast period. The increased market shares attributable to consumer tax credit s shown in
Table 17 .3. 3 were used as inputs in the NIA

- RIA model. Appendix 17

- A, section 17

- A.3, shows the annual market share increases due to this policy. Section 17

. 4 presents the resulting efficiency trends for the policy case of consumer tax credits for furnaces, CAC

, and HP that meet target efficiency levels

.

17.3.4 Manuf acturer Tax Credits

To analyze the potential effects of a policy that offers tax credits to manufacturers that produce furnaces, CAC, or HP that meet target efficiency levels, DOE assumed that a
manufacturer tax credit would lower the consumer’s purchase cost by an amount equivalent to that provided by the consumer rebates or tax credits described above. DOE further assumed that
manufacturers would pass on some of their reduced costs to consumers, causing a direct price effect. DOE assumed that no announcement effect would occur, because the program would not
be visible to consumers. f Because the direct price effect is approximately equiva lent to the

announcement effect

, 11 DOE estimated that a manufacturer tax credit would induce half the number of consumers assumed to take advantage of a consumer tax credit to purchase more efficient products. This assumed participation rate is equal to 30 percent of the number of

consumers who would participate in a rebate program.

DOE attempted to in vestigate manufacturer response to the Energy Efficient Appliance Credits for manufacturers mandated by EPACT 2005. 17 Those manufacturer tax credits were in

effect for m odels produced in 2006 and 2007, reinstated for 2009 and 2010 , and extended to 2011 with modifications in the eligibility requirements. DOE was unable to locate data f rom the Internal Revenue Service or other sources on manufacturer response to the Federal credits. Appendix 17

- A , section 17

- A.7 .2, presents details on Federal manufacturer tax credits.

DOE applied the assumption of 30 percent participation to the penetra tion rates predicted for the rebate policy to estimate the effects of a manufacturer tax credit policy. In doing so, the Department incorporated the assumptions for consumer response to financial incentives from the penetration curves selected for each pro duct class.

Table 17 .3.4 summarize s DOE’s assumptions for furnaces, CAC

, and HP regarding the market penetration of units in 2016 meeting target efficiency levels given a manufacturer tax
credit.

f Note that this is a conservative assumption, since it is possible that manufacturers or utility/agency efficiency programs might promote the models for which manufacturers increase production due to the tax credits, which in turn might induce some announcement effect. However, DOE found no data on such programs on which to base an

estimate of the magnitude of this possible announcement effect on consumer behavior.17

- 14 Table 17.3.4 Market Penetrations in 2016 Attributable to Manufacturer Tax Credits

for Gas Furnaces, CAC and HP in Selected Regions

Non

Weatherized Gas Furnaces, North Region
% Split System

Air Conditioners,

Hot

- Humid Region % Split System Heat Pumps,

Hot

- Humid Region %

Base

- Case Market Share of Units that Meet Target Levels 71 27 47 Market Share of Units that Meet Target

Levels With Manufacturer Tax Credits 73 42 57

Increased Market Share of Units that Meet Target Level With Manufacturer Tax Credits 2 15 10

DOE assumed that this policy would transform the market permanently, so that the
increase s in market share seen in the first year of the program would be maintained throughout the forecast period. The increased market shares attributab le to a manufacturer tax credit shown
in Table 17 .3. 4 were used as inputs in the NIA

- RIA model. Appendix 17

- A, section 17

- A.3, shows the annual market share increases due to this policy

. Section 17 .4 presents the resulting efficiency trend s for the policy case of manufacturer tax credits for furnaces, CAC

, and HP

.

17.3.5 Voluntary Energy Efficiency Targets

For each product, DOE assumed that voluntary energy efficiency targets would be achieved as manufacturers gradually stopped producing units that operated below the target efficiency levels. DOE assumed that the impetus for phasing out production of low

- efficiency units would be a program similar to the ENERGY STAR labeling program conducted by the Environmental Protection Agency (EPA) a nd DOE. The ENERGY STAR program specifie s the minimum energy efficienc ies that various products, including split system heat pumps , must have to receive the ENERGY STAR label . ENERGY STAR encourages consumers to purchase efficient products via marketing that promotes consumer label recognition, various incentive programs that adopt the ENERGY STAR specifications, and manufacturers’ promotion of their qualifying appliances. ENERGY STAR projects market penetration of compli ant appliances and estimates the percentage of sales of compliant appliances that are attributable to the ENERGY STAR program.

Researchers have analyzed the ENERGY STAR program’s effects on sales of several consumer products. Program efforts generally involve a combination of information dissemination and utility or agency rebates. The analyses have been based on State

- specific data
on percentages of shipments of various appliances that meet ENERGY STAR specifications. The analyses generally have conclu ded that the market penetration of ENERGY STAR

- qualifying appliances is higher in regions or States where ancillary promotional programs have been

active. 18

, 19

, 20

DOE based its estimates of market penetration for the three product classes on the ENERGY STAR projections for residential gas furnaces , split system air conditioners, and split17

- 15 system heat pumps

. DOE esti mated the percentage of market shares attributable to the existing ENERGY STAR program for each product for 1995

– 2025

. 21 DOE then assumed that an

enhanced ENERGY STAR program for each product would pro duce an additional 50 percent
above the annual increases in ma rket penetration shown by the existing program s , beginning i n 2016 . From this forecast DOE calculated the annual percent increases in market share for units represented by the shipments attributed to ENERGY STAR

. DOE added those percent increases

to the market share s of gas furnaces, CAC

, and HP that me t the target level s in the RIA base

case , starting in 2016 , to obtain the annual market share s of units meeting the target efficiency level in the voluntary efficiency targets case

.

DOE estimated that the programs develo ped in support of the voluntary efficiency targets policy would increase market shares of ef ficient units

. Appendix 17

- A, section 17

- A.3 , shows the annual market share increases due to this policy used as inputs to the NIA

- RIA model.
Section 17 .4 presents the resulting efficiency trends for the policy case of voluntary energy efficiency targets for gas furnaces, split system air conditioners

, and split system heat pumps that meet target efficiency levels.

17.3.6 Early Replacement

The non

- regulatory policy of early replacement refers to a program to replace residential appliances before the ends of their useful lives. The purpose of such a policy is to replace old, inefficient units with higher efficiency units. The economic fea sibility of early replacement depends on the vintage of the unit being replaced, the installed cost of the new unit , and the energy cost savings. Since the base case market shares of the three product classes are very high, and many units in the existing s tock are already at or near the target levels, an early replacement program would not yield positive energy savings. Therefore DOE did not analyze an early replacement policy for furnaces, CAC

, and HP.

17.3.7 Bulk Government Purchases

DOE assumed that a policy requiring bulk government purchases would lead to Federal, State, and local governments purchasing products that meet target efficiency levels. Combining
the market demands of multiple public sectors also would provide a market signal to manufacturers and vendors that some of their largest customers seek products that meet an efficiency target at favorable prices. Such a program also could induce “market pull,” whereby
manufacturers and vendors would achieve econ omies of scale for high efficiency products.

Most of the previous bulk government purchase (procurement) initiatives at the Federal, State, and municipal levels have not tracked data on number of purchases or degree of compliance with procurement speci fications. In many cases, procurement programs are decentralized, being part of larger State or regional initiatives. DOE based its assumptions regarding the effects of a policy calling for bulk government purchases on studies the Federal Energy Management Program (FEMP) performed regarding the savings potential of its procurement specifications for appliances and other equipment. FEMP, however, does not track purchasing data, because of the complex range of purchasing systems, number of vendors, etc.17

- 16 State s, counties, and municipalities have demonstrated increasing interest and activity in “green purchasing." Although many of the programs target office equipment, the growing infrastructure for developing and applying efficient purchasing specifications indi cates that bulk government purchase programs are feasible. 22

, 23

DOE assumed that government agencies, such as the Department of Housing and Urban Development, would administer a bulk purchasing program for furnaces, CAC, and HP . The bulk purchasing policy also could be incorporated at the Federal level into th e FEMP program, which has established procurement guidelines. Federal construction requirements include the FEMP guidelines for installing or replacing equipment. The FEMP program currently has procurement guidelines in place for gas furnaces, central air conditioners, and air source heat

pumps

. 24

, 25

, 26

DOE also reviewed its own previous research on the potential for market transformation through bulk government purchases. Its major study analyzed several scenarios based on the assumption that 20 percent of Federal equipment purchas es in the year 2000 already incorporated energy efficiency requirements based on FEMP guidelines. One scenario in the DOE r eport showed energy

- efficient Federal purchasing ram ping up during 10 years from 20 percent to 80 percent of all Federal purchases. 27

Based on its study described above, DOE estimated that a bulk government purchas e program instituted within a 10

- year period would result in at least 80 percent of government

purchased split system air conditioners meeting target efficiency levels.

DOE assumed that bulk government purchases would affect a subset of housing unit s for which government agencies purchase d or influence d the purchase of split system ai r conditioners . This subset would consist primari ly of public housing and housing on military
bases. DOE defined this subset based on publicly owned housing identified in the American Housing Survey (AHS) for 2009, which was 1.8 million households, or about 1.4 percent of all

U.S. households

. 28 (The AHS reports 130.0 million U.S. households. 29 ) According to the 2005 Residential Energy Consumption Survey (RECS 2005), 33 percent of publicly owned h ousehol ds

had gas furnaces, 33 percent had central air conditioners , and 8 percent had heat pumps

. 30 DOE
therefore estimated that 0.5 percent of U

. S

. hous ing units represent publicly owned households using gas furnaces, 0.5 percent using central a ir conditioners, and 0.1 percent heat pumps ; this
constitute s the population to which this policy would apply.

DOE estimated that each year of a bulk government purchase policy ( 2016 ) an increasing percent of shipments of government

- purchased units beyond t he base case would meet target efficiency levels. Since the market penetration for all three product classes was already reaching close to 100 percent during the analysis period, DOE estimated that within 10 years ( by 2024 ) bulk government purcha si ng programs would result in 100 percent of the air conditioner market17

- 17 for publicly owned housing meeting target levels. g DOE modeled the bulk government purchase program assuming that the market share for each product achieved in 2024 would be maintaine d

t hroughout the rest of the forecast period

. Appendix 17

- A, section 17

- A.3 , shows the annual market share increases due to this policy used as inputs to the NIA

- RIA model. Section 17 .4
presents the resulting efficiency trends for the policy case of bulk gove rnment purchase of gas furnaces, CAC

, and HP

.

17.4 IMPACT S OF NON

- REGULATORY ALTERNATI VE S

Figure s 17 .4.1 through 17.4.3 show the effects of each non

- regulatory policy on market penetration for non

- weatherized gas furnaces in the nort h region and for split system air
conditioners and split system heat pumps in the hot

- humid region

. The market share of products that meet the target level in the base case is forecasted to be constant for some produ ct classes
and to increase over time for some product classes

. Note that for product classes whose base case market shares are 100 percent, the non

- regulatory policies have no impact and therefore their projections are identical to the base case. For the o ther product classes whose base case market shares are less than 100 percent, relative to the base case, the policy cas es increase the market shares that meet the target level. Recall also that DOE did not analyze the Early Replacement policy for any of t he gas furnace, CAC, or HP product classes.

Figures 17.4.1 through 17.4.3 show results for residential sector gas furnaces, CAC, and HP; these results do not include units used in the commercial sector. Note that the proposed standards (not shown in the figures) would result in a 100 percent market penetration of products that meet the target efficiency level.

g For some product classes where the market share in the base case was already above 80%, the estimated 10

- year market penetration was set at 90% or 100%.17

- 18 Figure 17.4.1 Market Penetration of Non

- Weatherized Gas Furnaces in the North Region Meeting the Target Level in Policy Cases

Figure 17.4.2 Market Penetration of Split System Air Conditioners in the

Hot

- Humid Region Meeting the Target Level in Policy Cases 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0%201620172018201920202021202220232024202520262027202820292030203120322033203420352036203720382039204020412042204320442045 Consumer Rebate

Consumer Tax Credit

Manufacturer Tax Credit

Voluntary Efficiency Targets

Early Replacement

Bulk Purchasing

Base Case

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0%201620172018201920202021202220232024202520262027202820292030203120322033203420352036203720382039204020412042204320442045 Consumer Rebate

Consumer Tax Credit

Manufacturer Tax Credit

Voluntary Efficiency Targets

Early Replacement

Bulk Purchasing

Base Case17

- 19 Figure 17.4.3 Market Penetration of Split System Heat Pumps in the Hot

Humid Region Meeting the Target Level in Policy Cases

Tables 17 .4 .1 through 17 .4

. 3 show the national energy savings and net present value (NPV) for five non

- regulatory polic ies analyzed in detail for furnaces, CAC

, and HP for all region s . T he target level for each policy equal s the efficiency level in the corresponding proposed standard

. Th e results shown in these tables represent savings and NPV for units used in
the residential sector only. Note that the Standards results are for all product classes in all regions, while the policy results are for the three major product classes analyzed for this RIA.

The cases in which no regulatory action is taken with regard to furnaces, CAC

, and HP
constitute the base case s (or "No New Regulatory Action" scenarios ) , in which energy savings
and NPV are zero by definition. For comparison, the tables include the impacts of the proposed
standard s. Energy savings are given in quadrillion British thermal units (quads). The NPV s shown in Tables 17 .4 .1 through 17 .4 .3 are ba sed on two discount rates, 7 percent and 3 percent

.

For non

- weatherized gas furnaces, consumer rebates provide the most national energy savings of the non

- regulatory policies , while manufacturer tax credits provide the least savings

. For split

- system air conditioners and heat pumps, consumer rebates provide the most national energy savings , while bulk government purchases provide the least savings

. 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0%201620172018201920202021202220232024202520262027202820292030203120322033203420352036203720382039204020412042204320442045 Consumer Rebate

Consumer Tax Credit

Manufacturer Tax Credit

Voluntary Efficiency Targets

Early Replacement

Bulk Purchasing

Base Case17

- 20 Table 17.4.1 Impacts of Non

- Regulatory Alternatives for Non

- Weatherized Gas

Furnaces in All Regions that Meet the Proposed Standard (TSL 4)

Policy Alternative Primary Energy Savings Net Present Value*

quads 7% discount

rate billion 200 9 $

3% discount

rate

Consumer Rebates 0.039 0.087 0.231

Consumer Tax Credits 0.016 0.037 0.097

Manufacturer Tax Credits 0.005 0.013 0.033 Voluntary Energy Efficiency Targets 0.208 0.320 1.098
Early Replacement

Bulk Government Purchases 0.004 0.006 0.020
Proposed Standards 2.117 2.683 10.287

* For products shipped in 2016 ─ 2045

Table 17.4.2 Impacts of Non

- Regulatory Alternatives for Split System Air

Conditioners in All Regions that Meet the Proposed Standard (TSL 4)

Policy Alternative Primary Energy Savings Net Present Value*

quads 7% discount

rate billion 200 9 $

3% discount

rate

Consumer Rebates 0.112

- 0.411

- 0.216

Consumer Tax Credits 0.059

- 0.223

- 0.121

Manufacturer Tax Credits 0.026

- 0.099

- 0.054
Voluntary Energy Efficiency Targets 0.002 0.005 0.013
Early Replacement

Bulk Government Purchases 0.001 0.001 0.003
Proposed Standards 0.223 0.429 1.161

* For products shipped in 2016 ─ 204517

- 21 Table 17.4.3 Impacts of Non

- Regulatory Alternatives for Split System Heat Pumps in All Regions that Meet the Proposed Standard (TSL 4)

Policy Alternative Primary Energy Savings Net Present Value*

Quads 7% discount

rate billion 200 9 $

3% discount

rate

Consumer Rebates 0.052 0.108 0.272

Consumer Tax Credits 0.027 0.056 0.140

Manufacturer Tax Credits 0.012 0.025 0.062 Voluntary Energy Efficiency Targets 0.004 0.012 0.027
Early Replacement

Bulk Government Purchases 0.000 0.000 0.000
Proposed Standards 0.385 0.601 1.838

* For products shipped in 2016 ─ 2045

Tables 17.4.4 through 17.4.6 show the NES and NPV results for NWGF in the north region and for CAC and HP in the hot

- humid region. These results correspond to the market shares in Figures 17.4.1 through 17.4.3. In these tables, results for the proposed standards are not shown, since the standards results are for all regions and therefore are not comparable to the regional results in T ables 7.4.4 through 17.4.6.

Table 17.4.4 Impacts of Non

- Regulatory Alternatives for Non

- Weatherized Gas Furnaces in the North Region t hat Meet the Proposed Standard (TSL 4)

Policy Alternative Primary Energy Savings Net Present Value*

quads 7% discount

rate billion 200 9 $

3% discount

rate

Consumer Rebates 0.039 0.087 0.231

Consumer Tax Credits 0.016 0.037 0.097

Manufacturer Tax Credits 0.005 0.013 0.033
Voluntary Energy Efficiency Targets 0.208 0.320 1.098
Early Replacement

Bulk Government Purchases 0.004 0.006 0.020

* For products shipped in 2016 ─ 204517

- 22 Table 17.4.5 Impacts of Non

- Regulatory Alternatives for Split System Air

Conditioners in the Hot

- Humid Region that Meet the Proposed Standard (TSL 4)

Policy Alternative Primary Energy Savings Net Present Value*

quads 7% discount

rate billion 200 9 $

3% discount

rate

Consumer Rebates 0.088

- 0.248

- 0.136

Consumer Tax Credits 0.046

- 0.135

- 0.076

Manufacturer Tax Credits 0.020

- 0.060

- 0.034
Voluntary Energy Efficiency Targets 0.002 0.003 0.007
Early Replacement

Bulk Government Purchases 0.000 0.001 0.002

* For products shipped in 2016 ─ 2045

Table 17.4.6 Impacts of Non

- Regulatory Alternatives for Split System Heat Pumps in

the Hot

- Humid Region that Meet the Proposed Standard (TSL 4)

Policy Alternative Primary Energy Savings Net Present Value*

Q uads 7% discount

rate billion 200 9 $

3% discount

rate

Consumer Rebates 0.039 0.084 0.199

Consumer Tax Credits 0.020 0.044 0.102

Manufacturer Tax Credits 0.009 0.019 0.045
Voluntary Energy Efficiency Targets 0.003 0.008 0.019
Early Replacement

Bulk Government Purchases 0.000 0.000 0.000

* For products shipped in 2016 ─ 204517

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