CHAPTER 17. REGULATORY IMPACT ANALYSIS

TABLE OF CONTENTS

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

17.2 METHODOLOGY ........................................................................................................ 17­1
 

17.2.1 Policy Considerations ........................................................................................ 17­2
 

17.2.1.1 Policy Assumptions ......................................................................... 17­2
 

17.2.1.2 Policy Interactions ........................................................................... 17­3
 

17.2.2 Non­Regulatory Policy Assumptions ................................................................ 17­3
 

17.2.2.1 No New Regulatory Action ............................................................. 17­3
 

17.2.2.2 Financial Incentives Policies............................................................ 17­4
 

17.2.2.3 Commercial Customer Tax Credits ................................................. 17­4
 

17.2.2.4 Commercial Customer Rebates........................................................ 17­5
 

17.2.2.5 Early Replacement Incentives.......................................................... 17­8
 

17.2.2.6 Bulk Government Purchases............................................................ 17­8
 

17.2.2.7 Regional Energy Conservation Standards ....................................... 17­9
 

17.2.3 Results Summary ............................................................................................... 17­9
 

LIST OF TABLES

Table 17.2.1 Cumulative National Energy Savings in Quads for Commercial

Refrigeration Equipment, 2012­2042 ................................................................ 17­3
 

Table 17.2.2 Tax Credit Energy Savings and NPV .................................................................. 17­5
 

Table 17.2.3 Average Percentage Price Reduction due to Rebate Program............................. 17­7
 

Table 17.2.4 Rebate Energy Savings and NPV ........................................................................ 17­8
 

Table 17.2.5 Non­Regulatory Alternatives to Standards........................................................ 17­10
 

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CHAPTER 17. REGULATORY IMPACT ANALYSIS
 

17.1 INTRODUCTION
 

Under the Process Rule, the U.S. Department of Energy (DOE) is committed to exploring

non­regulatory alternatives to energy conservation standards. DOE will prepare a draft

regulatory analysis under Executive Order 12866, “Regulatory Planning and Review,” which

will be subject to review by the Office of Information and Regulatory Affairs. 58 FR 51735

(September 30, 1993).

DOE identified five major alternatives to energy conservation standards as feasible policy

options to achieve product energy efficiency. It will evaluate each alternative in terms of its

ability to achieve significant energy savings at a reasonable cost, and will compare the

effectiveness of each alternative to the effectiveness of the proposed standard.

The non­regulatory means of achieving energy savings that DOE proposes to analyze are

listed below. The Technical Support Document (TSD) in support of DOE’s Notice of Proposed

Rulemaking will include a quantitative analysis of each alternative, the methodology for which is

discussed briefly below.

•	 no new regulatory action

•	 commercial customer tax credits

•	 commercial customer rebates

•	 early replacement

•	 bulk government purchases

17.2 METHODOLOGY

DOE used the national energy savings (NES) spreadsheet model to calculate the NES and

the net present value (NPV) corresponding to each alternative of the proposed standards. The

NES spreadsheet model is discussed extensively in Chapter 10 of the TSD. To compare each

alternative quantitatively to proposed energy conservation standards, it was first necessary to

quantify the effect of each alternative on the purchase and use of energy­efficient commercial

equipment. Once each alternative is properly quantified, DOE made the appropriate revisions to

the inputs in the NES spreadsheet model. Key inputs that DOE revised in the NES spreadsheet

model are:

•	 energy prices and escalation factors;

•	 implicit market discount rates for trading off purchase price against operating

expense when choosing equipment efficiency;

•	 customer purchase price, operating cost, and income elasticities;

•	 customer price versus efficiency relationships; and

•	 equipment stock data (purchase of new equipment or turnover rates for

inventories).

The key measures of the impact of each alternative will be as listed below.

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•	 Commercial energy use in Quads (1015 Btu); the cumulative energy use of the

equipment from 2012 to 2042. DOE reports electricity consumption in terms of

primary energy.

•	 National energy savings is the cumulative national energy use from the base case

projection less the alternative policy case projection.

•	 Net present value is the value of future operating cost savings from commercial

refrigeration equipment bought in the period from 2012 to 2062. DOE calculates

the NPV as the difference between the present value of equipment and operating

expenditures (including energy) in the base case, and the present value of

expenditures in each alternative policy case for the life of the equipment. DOE

discounts future operating and equipment expenditures to 2006 using seven and

three percent real discount rates.

17.2.1 Policy Considerations

17.2.1.1 Policy Assumptions

The impacts of non­regulatory programs are uncertain by nature, since they depend on

program implementation and marketing efforts, and the subsequent response in customer

behavior. The projected impacts depend on the assumptions for the customer participation rate,

and are therefore subject to greater uncertainty than the impacts of mandatory standards, which

DOE assumed would have full compliance.

DOE assumed that each alternative policy would induce commercial customers to

voluntarily purchase at least some additional more energy efficient units as opposed to

mandatory purchases of more efficient equipment that would result from the proposed energy

conservation standards at any of the candidate standard levels (TSLs). Table 17.2.1 shows the

energy savings associated with standards at each of the considered TSLs (see Chapter 11 of the

TSD for additional information). In contrast to a standard at one of the TSLs, however, the

adoption rate of the alternative non­regulatory policy cases may not be 100 percent, which would

result in lower energy savings than a standard.

DOE assumed that the non­regulatory policy effects last from the assumed start date for

the mandatory amended energy conservation standards, 2012, through the end of the analysis

period, 2042 for energy savings and 2062 for NPV. This simplifying assumption means that the

policy affects the market for the entire analysis period, whether or not the incentives actually

continue. DOE did not consider administrative costs for any of the non­regulatory policies in its

analysis. Inclusion of such costs would decrease the NPV by a small amount.

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Table 17.2.1 Cumulative National Energy Savings in Quads for Commercial Refrigeration

Equipment, 2012­2042

Equipment

National Energy Savings (quads*) by Trial Standard

Level

Class TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

VOP.RC.M 0.047 0.067 0.128 0.128 0.336

VOP.RC.L 0.005 0.009 0.010 0.015 0.015

VOP.SC.M 0.005 0.014 0.027 0.027 0.040

VCT.RC.M 0.001 0.002 0.012 0.018 0.018

VCT.RC.L 0.030 0.334 0.344 0.448 0.448

VCT.SC.I 0.007 0.018 0.022 0.023 0.023

VCS.SC.I 0.000 0.001 0.002 0.002 0.002

SVO.RC.M 0.026 0.039 0.077 0.077 0.187

SVO.SC.M 0.004 0.013 0.028 0.028 0.043

SOC.RC.M 0.002 0.006 0.011 0.011 0.040

HZO.RC.M 0.001 0.004 0.006 0.007 0.007

HZO.RC.L 0.010 0.023 0.027 0.027 0.027

HZO.SC.M 0.000 0.001 0.001 0.002 0.002

HZO.SC.L 0.001 0.002 0.006 0.006 0.006

HCT.SC.I 0.002 0.013 0.014 0.016 0.016

*0.000 indicates savings are less than 0.0005 quadrillion Btu.

17.2.1.2 Policy Interactions

DOE calculated the impacts of each regulatory policy separately from those of the other

policies. In actual practice, certain policies are often most effective when implemented in

combination to provide incentives, such as early replacement and customer rebates, or early

replacement and bulk government purchases. DOE attempted to make conservative assumptions

to avoid double­counting policy impacts. Therefore, the policy impacts reported below are not

additive (i.e. the combined impact of several or all of the policies may not be inferred by adding

the results together).

17.2.2 Non­Regulatory Policy Assumptions

17.2.2.1 No New Regulatory Action

The case in which no regulatory action is taken constitutes the base case scenario

described in the CRE TSD, (See Chapter 11, National Impact Analysis). From its assessment of

current market shares and equipment and operating costs, DOE estimated forecasted shipments

and the distribution of efficiencies of the stock, from 2012 through 2042. This defines the basis

of comparison for all other scenarios, including the policy cases and the standard cases. By

definition, no new regulatory action yields zero energy savings and a net present value of zero

dollars.

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17.2.2.2 Financial Incentives Policies

DOE considered several scenarios in which the Federal government would provide some

form of financial incentive. It analyzed in detail two types of incentives: commercial customer

tax credits and commercial customer rebates. Tax credits could be granted to commercial

customers who purchase high efficiency CRE equipment. Alternatively, the government could

issue tax credits to manufacturers to offset costs associated with producing high­efficiency

equipment. For this analysis, only a commercial customer tax credit, patterned after provisions

in the EPACT of 2005, was considered. The second incentive program involved a commercial

customer rebate program that was nominally patterned after existing rebate programs currently

offered by several utilities.

17.2.2.3 Commercial Customer Tax Credits

DOE assumed a (commercial or industrial) customer tax credit that is patterned after the

tax credits that were created in EPACT 2005. EPACT 2005 provided tax credits to customers

who purchase and install specific products such energy­efficient windows, insulation, doors,

roofs, and heating and cooling equipment. For many of these equipment types, the tax credit is

equal to the 10 percent of the retail cost, up to specific dollar limits.

For the CRE tax credits analysis, DOE presumed the presence of a certification or other

program that could be used to identify high efficiency CRE products by energy consumption.

ARI is currently working to develop such a certification program. DOE proposed TSL 3 and

TSL 5 as likely candidate levels for a tax credit incentive. TSL 3 was chosen given that DOE

had already identified it as the minimum life­cycle cost level and maximum­NPV level for CRE

customers. TSL 5 is the max­tech efficiency level and provides the maximum energy savings for

each customer incentivized to purchase TSL 5 equipment.

DOE reviewed the incremental customer price increase to reach each efficiency level

across all 15 equipment classes. For 12 of the equipment classes (VOP.RC.M, VOP.RC.L,

VOP.SC.M, VCT.RC.M, VCT.RC.L, VCT.SC.I, VCS.SC.I, SVO.RC.M, SVO.SC.M,

HZO.SC.M, HZO.SC.L, and HCT.SC.I), the incremental price at TSL 3 was between 6.5 and

27.5 percent higher than for baseline equipment. For three equipment classes (SOC.RC.M,

HZO.RC.M, and HZO.RC.L), the incremental cost was less than five percent. For the TSL 3

tax credit scenario analysis, DOE assumed a tax credit equal to five percent of the customer

prices could be applied to the 12 product classes, but did not provide a credit for the three

product classes for which the incremental cost was less than five percent. The credits were

assumed to apply only to the retail cost of the equipment and not to any additional costs related

to installation.

The cost increments from the baseline to reach TSL 5 is wider than to reach TSL 3,

ranging from a 3.9 percent to a 50.4 percent cost increase. Three products at TSL 5 had a total

incremental cost increase of less than 10 percent (HZO.RC.M, HZO.RC.L, and VCS.SC.I).

Three additional equipment classes had an incremental cost of less than 16 percent (HZO.SC.M,

HCT.SC.I, HZO.SC.L). The remaining nine equipment classes had incremental cost increases of

20 to 50 percent. DOE opted to analyze a scenario DOE where tax credit equal to 10 percent of

the customer prices would be available for purchase of TSL 5 efficiency level equipment for 12

product classes (HZO.SC.M, HCT.SC.I, HZO.SC.L, VOP.RC.L, SOC.RC.M, VCT.RC.M,

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VCT.RC.L, VCT.SC.I, SVO.RC.M, SVO.SC.M, VOP.SC.M, VOP.RC.M). It assumed no tax

credit incentive for the three product classes for which the incremental cost was less than 10

percent at TSL 5.

The presence of a commercial customer tax credit in either the TSL 3 or TSL 5 tax credit

scenario elicits greater purchases of equipment with efficiencies above the baseline, which leads

to higher average aggregate efficiency and lower average aggregate energy consumption. The

change in market shares that may result from a five­percent tax credit scenario or the 10­percent

tax credit scenario was estimated per the method described in Chapter 11, and was similarly done

for the analysis for commercial customer rebates. No change in total equipment sales was

presumed.

From a societal point of view, tax credits, like rebates, do not change the installed cost of

the commercial refrigeration equipment; they simply transfer a portion of the cost from the

customer to taxpayers as a whole. Thus, for calculation of total cost of equipment in the

modified NIA study, the increase in sales by efficiency level due to tax credits estimates are

multiplied by the pre­rebate costs identical to those used in the base NIA discussed in Chapter

11.

Table 17.2.2 compares the cumulative energy savings and calculated NPV for the

national rebate program envisioned with those of the proposed standards action.

Table 17.2.2 Tax Credit Energy Savings and NPV

Policy alternatives

Cumulative Energy

Savings*

(quads), 2012­2042

Net Present Value**

(billion 2006$), 2012­2062

7%

Discount Rate

3%

Discount Rate

No New Regulatory Action 0 0 0

Commercial Customer Tax Credits (5% Scenario) 0.099 0.139 0.315

Commercial Customer Tax Credits (10% Scenario)

Today's Standards at TSL 5 1.208 (0.200) 1.16 * Energy savings are in source quads. ** Net present value is the value in the present of a time series of costs and savings.

17.2.2.4 Commercial Customer Rebates

DOE modeled the impact of the customer rebate policy by determining the increased

customer participation rate due to the rebates (i.e., the percentage increase in customers

purchasing high­efficiency equipment). It then applied the resulting increase in market share of

efficient units to the NES Spreadsheet Model to estimate the resulting NES and NPV with

respect to the base case.

After reviewing several utility rebate programs currently in place (see Chapter 3 of the

TSD), DOE decided to pattern the analysis of a national rebate program after the Energy Smart

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Grocer program offered by the California Public Utilities Commission, which provides rebates

for the use of specific component technologies. Several other utility programs identified in

Chapter 3 also appear to provide rebates for similar CRE component technologies. None of the

programs base rebates on an energy consumption threshold, as that data is largely unavailable

from either manufacturers or a central source such as a certification program. Eligible

participants in the Energy Star Grocer program include grocery and convenience stores, food

processors, and refrigerated warehouses operating in Pacific Gas & Electric, Southern California

Edison, or San Diego Gas & Electric service territories.

Rebates were not considered in two cases. In the first case, for the rebate programs

identified in Chapter 3 provide rebates based on improved components, rebates are generally

available for both new equipment purchases and for retrofits to existing commercial refrigeration

equipment, although often at different rebated levels and with qualifiers. For the RIA, DOE only

considered rebates on newly purchased commercial refrigeration equipment and not for retrofit

of existing equipment, as the standards action for which a non regulatory approach is being

compared with only addresses newly purchased equipment. In the second case, other utility

rebate or incentive programs available to CRE customers provide general rebates based on the

calculated annual kWh or kW reduction estimates, however such programs were not considered

by DOE in the RIA as these programs do not specifically target commercial refrigeration

equipment.

Under the Energy Smart Grocer programs, commercial and industrial businesses that

purchase commercial refrigeration equipment can receive payments for the incorporation of

specific technologies and/or for specific performance characteristics achieved in various classes

of commercial refrigeration equipment such as display cases, walk in coolers, and equipment

with remote condensers. Other rebate programs analyzed did not necessarily define the same set

of minimum conditions for eligibility.

DOE reviewed and incorporated, in the RIA, the rebates offered for energy saving

technologies considered applicable to the commercial refrigeration equipment product classes

analyzed in the engineering analysis. The technologies examined and rebates applied were:

Low­heat doors, $50/door; ECM motors, $20 per display case evaporator fan motor; LED

Lamps, $56 for each fluorescent lamp replaced. These values are currently used in the

EnergySmart Grocer program and represent values roughly in the middle of the ranges found for

other rebate programs. Where these technologies are employed in each class of commercial

refrigeration equipment, the average first cost reduction to all customers was calculated for each

of the efficiency levels analyzed in the LCC. The average percentage cost reduction was

calculated for each efficiency level in turn taking the rebates into account.

The rebates were then entered into the LCC analysis spreadsheet for each equipment

class as percentage reductions in equipment price. When compared against the incremental retail

price of higher efficiency commercial refrigeration equipment, as developed in Chapter 8 of the

TSD, the rebates range between 0 percent to up to 14 percent of the customer price depending on

TSL level and equipment class. Table 17.2.3 shows the calculated rebates by equipment class at

each TSL Level. For example, under the provisions of the national rebate program constructed

for this analysis, a vertical closed transparent, remote condensing, low temperature display case

(VCT.RC.L) would receive a rebate equivalent to 2.9 percent of the average purchase price, not

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including installation, at TSL 3. At TSL 5, the total rebate for incorporation of the set of

technologies would be 5.1 percent of the purchase price.

Table 17.2.3 Average Percentage Price Reduction due to Rebate Program

Equipment

Class*

Calculated Average Percentage Price Reduction due to

Rebate Program

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

VOP.RC.M

VOP.RC.L

VOP.SC.M

VCT.RC.M

VCT.RC.L

VCT.SC.I

VCS.SC.I

SVO.RC.M

SVO.SC.M

SOC.RC.M

HZO.RC.M

HZO.RC.L

HZO.SC.M

HZO.SC.L

HCT.SC.I

1.9% 1.9% 1.8% 1.8% 14.1%

2.9% 2.8% 2.8% 7.1% 7.1%

1.2% 2.9% 2.7% 2.7% 10.7%

0.0% 1.0% 3.2% 5.7% 5.7%

0.9% 2.9% 2.8% 5.1% 5.1%

0.7% 2.3% 4.8% 5.3% 5.3%

0.0% 1.3% 2.4% 2.4% 2.4%

1.4% 1.4% 1.4% 1.4% 11.9%

0.8% 1.5% 1.3% 1.3% 8.8%

0.0% 0.7% 0.7% 0.7% 7.0%

0.0% 1.3% 1.3% 1.2% 1.2%

1.3% 1.2% 1.2% 1.2% 1.2%

0.0% 0.8% 1.6% 1.6% 1.6%

0.0% 0.7% 1.3% 1.3% 1.3%

0.0% 0.0% 1.2% 1.2% 1.2%

* Equipment class designations consist of a combination (in sequential order separated by periods) of a equipment family code

(VOP=vertical open, SVO=semivertical open, HZO=horizontal open, VCT=vertical transparent doors, VCS=vertical solid doors,

HCT=horizontal transparent doors, HCS=horizontal solid doors, or SOC=service over counter), an operating mode code (RC=remote

condensing or SC=self­contained), and a rating temperature code (M=medium temperature (38°F), L=low temperature (0°F), or I=icecream temperature (­15°F)). For example, "VOP.RC.M refers to the "vertical open, remote condensing, medium temperature" equipment

class. See Chapter 3, Market and Technology Assessment, of the TSD for a more detailed explanation of the equipment class terminology

The rebates elicit increased purchases of higher efficiency equipment that lower the

overall average annual energy consumption per unit. Using the method described in Chapter 11

of the TSD to estimate market shares, a new distribution of sales by efficiency level

(corresponding to the various TSLs) was computed. The resulting increase in sales of higher

efficiency level equipment results in energy savings compared with the base case.

Although the rebate program lowers the retail cost to the customer, it must be financed by

tax revenues. So, from a societal point of view, the installed cost at any efficiency level does not

change with the rebate policy, it simply transfers part of the cost from the customer to taxpayers

as a whole. Thus, the calculation of equipment total cost in the rebate case is calculated as the

revised estimated sales by efficiency level due to the rebates multipled by the pre­rebate

equipment prices (identical to those in the base NIA discussed in Chapter 11). Table 17.2.4

compares the cumulative energy savings and calculated NPV for the national rebate program

envisioned with those of the proposed standards action.

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Table 17.2.4 Rebate Energy Savings and NPV
 

Policy alternatives

Cumulative Energy

Savings*

(quads), 2012­2042

Net Present Value**

(billion 2006$), 2012­2062

7%

Discount Rate

3%

Discount Rate

No New Regulatory Action 0 0 0

Commercial Customer Rebates 0.099 0.139 0.315

Today's Standards at TSL 5 1.208 (0.200) 1.16 * Energy savings are in source quads. ** Net present value is the value in the present of a time series of costs and savings.

17.2.2.5 Early Replacement Incentives

Early replacement refers to the replacement of commercial refrigeration equipment

before the end of their useful lives. The purpose of this policy is to retrofit or replace old,

inefficient equipment with high efficiency units. DOE studied the feasibility of a Federal

program to promote early replacement of appliances and equipment under EPACT 1992. In this

study, DOE identified Federal policy options for early replacement that include a direct national

program, replacement of Federally­owned equipment, promotion through equipment

manufacturers, customer incentives, incentives to utilities, market behavior research, and

building regulations.

While cost­effective opportunities to install units that are more efficient exist, DOE

determined that a Federal early replacement program is not economically justified because the

market for CRE is relatively small and distributed across abroad set of customers, the savings are

not expected to be significant. In addition, a temporary surge in CRE sales in the early 2000s

effectively reduces the size of the market that would be subject to early replacement, thus further

reducing the potential for an effective early replacement program.

17.2.2.6 Bulk Government Purchases

In this policy alternative, bulk government purchases refers to Federal, State, and local

governments being encouraged to purchase equipment meeting the energy conservation

standards. The motivations for this policy are that (1) aggregating public sector demand could

provide a market signal to manufacturers and vendors that some of their largest customers seek

suppliers with equipment that meet an efficiency target at good prices, and (2) this could induce

“market pull” impacts through the effects of manufacturers and vendors achieving economies of

scale for high efficiency equipment.

As with the early replacement, bulk government purchases may provide cost effective

opportunities to install more efficient equipment on a limited basis, however it was concluded

that a widespread bulk purchase program was not economically justified. This is because the

segment/share of the market that would be affected by a bulk government purchase program is a

small portion of an already relatively small market, as the vast majority of the shipments/sales

are to non­governmental customers.

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17.2.2.7 Regional Energy Conservation Standards

DOE lacks authority to adopt regional standards, so it must reject this alternative.

However, DOE does have authority to grant State petitions for an exemption from Federal

preemption of higher standards, if the State filing the petition demonstrates unusual and

compelling State or local energy interests (42 U.S.C. 6297(d) and 6316(b)(2)(D)). The State has

a heavy burden in making such a showing, and DOE must reject the petition if “interested

persons” establish that the State regulation would “significantly burden manufacturing,

marketing, distribution, sale or servicing” of the covered equipment on a national basis.

(42 U.S.C. 6297(d))

Because of the potential variability of standards by State and the widely differing

economic and climate situations, DOE did not undertake a quantitative analysis of regional

standards.

17.2.3 Results Summary

Table 17.2.5 shows the national energy savings (NES) and NPV for the non­regulatory

alternatives analyzed. The case in which no regulatory action is taken with regard to commercial

refrigeration equipment constitutes the base case (or "No Action") scenario. Since this is the

base case, energy savings and NPV are zero by definition. For comparison, the table includes

the results of the NES and NPV for TSL 3 associated with a possible energy conservation

standard. Energy savings expressed in quadrillion Btu (Quads) in terms of primary or source

energy, which includes generation and transmission losses from electricity utility sector (the

estimation of source energy is explained in Chapter 10. The NPVs shown in the table refer to the

NPV for commercial customers based on real discount rates of 7 and 3 percent.

As indicated in Table 17.2.5, none of the policy alternatives DOE examined would save

as much energy as and have a lower NPV than several of the TSLs for energy conservation

standards. Also, several of the alternatives would require new enabling legislation, such as

commercial customer or Federal tax credits, since authority to carry out those alternatives does

not presently exist.

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Table 17.2.5 Non­Regulatory Alternatives to Standards
 

Policy alternatives

Cumulative Energy

Savings*

(quads), 2012­2042

Net Present Value**

(billion 2006$), 2012­2062

7%

Discount Rate

3%

Discount Rate

No New Regulatory Action 0 0 0

Commercial Customer Tax Credits 0.084 0.178 0.381

Commercial Customer Rebates 0.099 0.139 0.315

Today's Standards at TSL 3 0.715 1.20 3.25 * Energy savings are in source quads. ** Net present value is the value in the present of a time series of costs and savings.

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REFERENCES
 

1.	 U.S. Department of Energy. Energy Information Administration. Commercial Sector

Demand Model of the National Energy Modeling System: Model Documentation 2007.

DOE/EIA­M066(2007).

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