17-i

CHAPTER 17. REGULATORY IMPACT ANALYSIS

TABLE OF CONTENTS

17.1 INTRODUCTION ................................................................................................... 17-1

17.2 NON-REGULATORY POLICIES.......................................................................... 17-2

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 ASSUMPTIONS ................................................ 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 ALTERNATIVES................................... 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 Market Penetrations in 2016 Without and With Rebates for Gas 

Furnaces, CAC and HP in Selected Regions................................................ 17-11

Table 17.3.3 Market Penetrations in 2016 Attributable to Consumer Tax Credits for 

Gas Furnaces, CAC and HP in Selected Regions......................................... 17-12

Table 17.3.4 Market Penetrations 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).... 17-21
17-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, HotHumid 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 ....................................... 17-19
17-1

CHAPTER 17. REGULATORY IMPACT ANALYSIS

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 Executive 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 standards 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 nonregulatory alternatives, comparing the costs and benefits of each to those of the proposed 

standards. 58 FR 51735, page 51741. As noted in E.O. 12866, this 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 

models built on the NIA models 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 these residential 

product classes.

DOE identified six non-regulatory policy alternatives that possibly could provide 

incentives for the same energy efficiency levels as the proposed standards 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 models 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, discusses the new NIA-RIA integrated 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 standards. 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 products 

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 

standards 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 percentage 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 attributable 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-regulatory alternative in the same way it did for the proposed 

standards. 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 slightly.

 

a The 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 

those 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 robustness 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 with 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 affected 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 regulatory action). The analysis considered that each alternative policy would induce 

consumers to purchase units having the same efficiency levels as required by the proposed 

standards (the target levels). As opposed to the standards case, however, the policy cases may not 

lead to 100 percent market penetration of units that meet target levels.

Table 17.2.1 shows the efficiency levels stipulated in the proposed standards 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 Countrya 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 calculated 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 

implemented 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 summing their 

results. 

Section 17.4 presents graphs that show the market penetration estimated under each nonregulatory policy for furnaces and central air conditioners and heat pumps.

17.3 NON-REGULATORY POLICY ASSUMPTIONS

The following subsections describe DOE’s analysis of the impacts of the six nonregulatory policy alternatives to proposed standards for furnaces and central air conditioners and 

heat pumps. (Because the alternative of No New Regulatory Action has no energy or NPV 

impacts, essentially representing the NIA base case, DOE did not perform any additional 

analysis for that alternative.) DOE developed estimates of the market penetration of highefficiency 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 

chapter 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 the scenario in which the Federal government would provide financial 

incentives in the form of rebates to consumers for purchasing energy-efficient appliances. This 

policy provides a consumer rebate for purchasing non-weatherized gas furnaces, split system air 

conditioners, or split system heat pumps that operate at (or above) the same efficiencies as 

stipulated in proposed standards (target levels)

17.3.2.1 Methodology

To inform its estimate of the market impacts of consumer rebates, DOE performed a 

thorough search for existing rebate programs nationwide. It gathered data on utility or agency 

rebates for furnaces, air conditioners, and heat pumps throughout the country. 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 

SEEARP 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 the 50 States and six U.S. 

territories, each selecting its own appliances, rebate levels, efficiency levels, appliance recycling requirements, and 

eligible populations.

summarized experiences with various utility rebate programs.3 XENERGY’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 on specific utility program data rather than multiutility data. Some models in use by energy efficiency program evaluation experts were so clientspecific that generic relationships between economic parameters and consumer response could 

not be established.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, section 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 mechanisms 

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 penetration (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 extremely 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 interpolation 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, sections 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 increases in market penetration of products meeting the target level relative to 

their market penetrations in the base case. It did this using the interpolated penetration curves

created for each representative product class based on the XENERGY methodology to best 

reflect the market barrier levels faced by each product class. Section 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 ratios via 

a rebate that would pay part or all of the increased installed cost of a unit that met the target 

efficiency level compared to one meeting the baseline efficiency level.

d

 

d The baseline technology for each product class is defined in the engineering analysis, 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 

amounts on a large sample of utility and agency rebate programs for gas furnaces. DOE gathered 
17-7

data on 159 rebates for gas furnaces, 343 rebates for air conditioners, and 536 rebates for heat 

pumps initiated by hundreds 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 the simple average of the rebate amounts for units meeting the target levels in these sets of 

programs. DOE assumed that these average rebates amounts would apply to models at all 

efficiency levels at or above the target level for this product class.

DOE assumed that rebates would remain in effect at the same levels throughout the 

forecast 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 larger B/C ratio. Table 17.3.1 shows the effects of consumer 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 represents a weighted averagee 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 With Rebates for Gas Furnaces, CAC

and HP in Selected Regions (2009$)

NonWeatherized 

Gas Furnaces, 

North Region

Split System Air 

Conditioners, HotHumid Region

Split System 

Heat Pumps, 

Hot-Humid 

Region

B/C Ratio Without Rebate 3.5 1.8 3.0

Rebate Amount $228 $287 $439 

B/C Ratio With Rebate 5.5 Inf. Inf.

Calculated Market Barrier Curve No - Low No No - Low

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

DOE used these B/C ratios along with the penetration curves shown in Figures 17.3.1

through 17.3.3 to estimate the percentage of consumers who would purchase furnaces, SAC and 

SHP 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 the no barriers and low 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 curves.

 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 90 100

Penetration Rate

Benefit/Cost Ratio

No Estimated Low No Rebate With Rebate
17-9

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 90 100

Penetration Rate

Benefit/Cost Ratio

Low Estimated Moderate No Rebate With Rebate
17-10

Figure 17.3.3 Market Penetration Curve for Split System Heat Pumps, HotHumid 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 

the 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 for 

the three product classes in 2016. DOE used the resulting increases in market shares as inputs to 

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 90 100

Penetration Rate

Benefit/Cost Ratio

No Estimated Low No Rebate With Rebate
17-11

Table 17.3.2 Market Penetrations in 2016 Without and With Rebates for Gas 

Furnaces, CAC and HP in Selected Regions

NonWeatherized 

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 Rebates 78 77 81

Increased Market Share of Units that 

Meet Target Level With Rebates 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 effect of rebates and tax credits into a direct price effect, 

which derives 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 marketing and modifications in markup and pricing. DOE assumed that the 

rebate and consumer tax credit policies would encompass both direct price effects and 

announcement effects, and that half the increase in market penetration associated with either 

policy would be due to the direct price effect and half to the announcement effect.

In estimating the effects of a tax credit on purchases of consumer products that meet new 

efficiency standards, DOE assumed the amount of the tax credits for each product class would 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 advantage 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 Federal 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, and 
17-12

furnace fans for new or existing homes.14 Those tax credits were in effect in 2006 and 2007, 

expired in 2008, reinstated 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 conservation 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 to 

provide support for its assumptions.

16 In the previous analysis, 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 response to financial 

incentives from the penetration curves selected for each product class. 

Table 17.3.3 summarizes DOE’s assumptions for furnaces, CAC, and HP regarding the 

market penetration of units in 2016 that meet target efficiency levels given a consumer tax credit. 

Table 17.3.3 Market Penetrations in 2016 Attributable to Consumer Tax Credits for 

Gas Furnaces, CAC and HP in Selected Regions

NonWeatherized 

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 

increases in market shares seen in the first year of the program would be maintained throughout 
17-13

the forecast period. The increased market shares attributable to consumer tax credits 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 Manufacturer 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 equivalent 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 investigate manufacturer response to the Energy Efficient Appliance 

Credits for manufacturers mandated by EPACT 2005.17 Those manufacturer tax credits were in 

effect for models 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 from 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 penetration 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 product class. 

Table 17.3.4 summarizes 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

NonWeatherized 

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 

increases in market share seen in the first year of the program would be maintained throughout 

the forecast period. The increased market shares attributable 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 trends 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) and DOE. The ENERGY STAR program specifies the 

minimum energy efficiencies 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 compliant 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 concluded 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 split 
17-15

system heat pumps. DOE estimated 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 produce an additional 50 percent 

above the annual increases in market penetration shown by the existing programs, beginning in 

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 shares of gas furnaces, CAC, and HP that met the target levels in the RIA base 

case, starting in 2016, to obtain the annual market shares of units meeting the target efficiency 

level in the voluntary efficiency targets case.

DOE estimated that the programs developed in support of the voluntary efficiency targets 

policy would increase market shares of efficient 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 feasibility 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 stock 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 economies 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 specifications. 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

States, 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 indicates 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 the 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 purchases in the year 2000 already incorporated 

energy efficiency requirements based on FEMP guidelines. One scenario in the DOE report 

showed energy-efficient Federal purchasing ramping 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 purchase

program instituted within a 10-year period would result in at least 80 percent of governmentpurchased split system air conditioners meeting target efficiency levels. 

DOE assumed that bulk government purchases would affect a subset of housing units for 

which government agencies purchased or influenced the purchase of split system air 

conditioners. This subset would consist primarily 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 households 

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. housing units represent publicly owned households 

using gas furnaces, 0.5 percent using central air conditioners, and 0.1 percent heat pumps; this

constitutes 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 the 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 purchasing programs would result in 100 percent of the air conditioner market 
17-17

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 maintained 

throughout 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 government purchase of gas 

furnaces, CAC, and HP.

17.4 IMPACTS OF NON-REGULATORY ALTERNATIVES 

Figures 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 north 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 product 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 other product classes whose base case market 

shares are less than 100 percent, relative to the base case, the policy cases increase the market 

shares that meet the target level. Recall also that DOE did not analyze the Early Replacement 

policy for any of the 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 Case
17-19

Figure 17.4.3 Market Penetration of Split System Heat Pumps in the HotHumid 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 policies analyzed in detail for furnaces, CAC, and HP for all

regions. The target level for each policy equals the efficiency level in the corresponding 

proposed standard. The 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 cases (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 

standards. Energy savings are given in quadrillion British thermal units (quads). The NPVs

shown in Tables 17.4.1 through 17.4.3 are based 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 Case
17-20

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 2009$

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 2009$

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─ 2045
17-21

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 2009$

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 Tables 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 that Meet the Proposed Standard (TSL 4) 

Policy Alternative

Primary Energy

Savings

Net Present Value*

quads

7% discount 

rate

billion 2009$

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─ 2045
17-22

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 2009$

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*

Quads

7% discount 

rate

billion 2009$

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─ 2045
17-23

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