12-i

CHAPTER 12. MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION ............................................................................................. 12-6

12.2 METHODOLOGY ............................................................................................ 12-6

12.2.1 Phase I: Industry Profile ............................................................................. 12-7

12.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide .................... 12-8

12.2.2.1 Industry Cash-Flow Analysis ....................................................... 12-8

12.2.2.2 Interview Guides........................................................................... 12-9

12.2.3 Phase III: Subgroup Analysis ..................................................................... 12-9

12.2.3.1 Manufacturing Interviews............................................................. 12-9

12.2.3.2 Revised Industry Cash-Flow Analysis........................................ 12-10

12.2.3.3 Manufacturer Subgroup Analysis............................................... 12-10

12.2.3.3.1 Small-Business Manufacturer Subgroup ..................... 12-10

12.2.3.3.2 SDHV Subgroup .......................................................... 12-11

12.2.3.4 Manufacturing Capacity Impact ................................................. 12-11

12.2.3.5 Employment Impact.................................................................... 12-12

12.2.3.6 Cumulative Regulatory Burden .................................................. 12-12

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

12.3.1 Adoption of Consensus Agreement.......................................................... 12-12

12.3.2 Potential for Significant Changes to Manufacturing Facilities................. 12-13

12.3.3 Increase in Product Repair and Migration to Alternative Products.......... 12-13

12.3.4 HFC Phase Out Legislation ...................................................................... 12-13

12.3.5 Physical Constraints.................................................................................. 12-14

12.3.6 Supply Chain Constraints......................................................................... 12-14

12.4 GRIM INPUTS AND ASSUMPTIONS.......................................................... 12-14

12.4.1 Overview of the GRIM............................................................................. 12-15

12.4.2 Sources for GRIM Inputs.......................................................................... 12-15

12.4.2.1 Corporate Annual Reports.......................................................... 12-15

12.4.2.2 Standard and Poor Credit Ratings............................................... 12-16

12.4.2.3 Dunn and Bradstreet Reports...................................................... 12-16

12.4.2.4 Shipment Model.......................................................................... 12-16

12.4.2.5 Engineering Analysis.................................................................. 12-16

12.4.2.6 Manufacturer Interviews............................................................. 12-17

12.4.3 Financial Parameters................................................................................. 12-17

12.4.4 Corporate Discount Rate........................................................................... 12-18

12.4.5 Trial Standard Levels................................................................................ 12-21

12.4.6 NIA Shipments ......................................................................................... 12-22

12.4.6.1 Shipments Forecast..................................................................... 12-24

12.4.7 Production Costs....................................................................................... 12-24

12.4.8 Incremental Manufacturer Production Costs for Standby Mode and Off Mode12-27

12.4.9 Conversion Costs...................................................................................... 12-29

12.4.9.1 Capital Conversion Costs ........................................................... 12-29

12.4.9.2 Product Conversion Costs........................................................... 12-31

12.4.10 Markup Scenarios......................................................................... 12-32

12.4.10.1 Preservation of Operating Profit Scenario................................ 12-33
12-ii

12.4.10.1 Tiered Markup Scenario ........................................................... 12-36

12.4.10.1 Preservation of Gross Margin Percentage Scenario ................. 12-40

12.4.11 Experience Curve Rates................................................................ 12-40

12.5 INDUSTRY FINANCIAL IMPACTS ............................................................ 12-40

12.5.1 Introduction............................................................................................... 12-41

12.5.2 Conventional Products Industry Financial Impacts.................................. 12-42

12.5.3 Niche Products Industry Financial Impacts.............................................. 12-44

12.6 IMPACTS ON SMALL BUSINESS MANUFACTURERS........................... 12-46

12.6.1 Impacts on Small Central Air Conditioning and Heat Pump Manufacturers12-47

12.6.2 Impacts on Small Residential Furnace Manufacturers............................. 12-48

12.7 OTHER IMPACTS.......................................................................................... 12-49

12.7.1 Employment.............................................................................................. 12-50

12.7.1.1 Methodology............................................................................... 12-50

12.7.1.2 Employment Impacts.................................................................. 12-51

12.7.2 Production Capacity.................................................................................. 12-52

12.7.2.1 Central Air Conditioner and Heat Pump Capacity Impacts........ 12-52

12.7.2.2 Residential Furnace Capacity Impacts........................................ 12-53

12.7.3 Cumulative Regulatory Burden ................................................................ 12-53

12.7.3.1 DOE Regulations for Other Products Produced by Affected 

Manufacturers............................................................................... 12-54

12.7.3.2 Other Federal Regulations.......................................................... 12-55

Unites States Clean Air Act ..................................................... 12-55

Potential Climate Change and Greenhouse Gas Legislation ... 12-55

12.7.3.3 Other Regulations That Could Impact Residential Refrigeration 

Manufacturers............................................................................... 12-56

Low and Ultra-low NOx Standards ......................................... 12-56

Canadian Energy Conservation Standards............................... 12-57

12.8 CONCLUSION................................................................................................ 12-58

12.8.1 Energy Efficiency Standards .................................................................... 12-60

12.8.1.1 Conventional Products................................................................ 12-60

12.8.1.2 Niche Furnace Products.............................................................. 12-63

12.8.1.1 SDHV Products .......................................................................... 12-65

12.8.2 Standby Mode & Off Mode Standards..................................................... 12-67

LIST OF TABLES

Table 12.4.1 GRIM Financial Parameters Based on 2004–2008 Weighted Company 

Financial Data .............................................................................................................. 12-17

Table 12.2.1 SBA and NAICS Classification of Small Businesses Potentially Affected by 

This Rulemaking.......................................................................................................... 12-11

Table 12.4.2 GRIM Revised Furnace And Central Air Conditioning And Heat Pump 

Financial Parameters.................................................................................................... 12-18

Table 12.4.3 Cost of Equity Calculation...................................................................... 12-19

Table 12.4.4 Cost of Debt Calculation......................................................................... 12-20
12-iii

Table 12.4.5 Energy Efficiency Levels For Central Air Conditioning and Heat Pump 

Products (SEER) and Furnace Products (AFUE) ........................................................ 12-21

Table 12.4.6 Trial Standard Levels for Energy Efficiency Analysis of Central Air 

Conditioner and Heat Pump (SEER) and Furnace (AFUE) Products.......................... 12-22

Table 12.4.7 Trial Standard Levels for Standby Mode and Off Mode Analysis of Central 

Air Conditioner and Heat Pump and Furnace Products (Watts).................................. 12-22

Table 12.4.8 Total Base Case NIA Shipments (in Millions of Units)......................... 12-23

Table 12.4.9 Manufacturer Production Cost Breakdown for Split AC – Coil Only 

Systems (2009$)........................................................................................................... 12-25

Table 12.4.10 Manufacturer Production Cost Breakdown for Split AC – Coil & Blower 

Systems (2009$)........................................................................................................... 12-25

Table 12.4.11 Manufacturer Production Cost Breakdown for Split System HP (2009$) 12-

26

Table 12.4.12 Manufacturer Production Cost Breakdown for Single Package AC Systems 

(2009$)......................................................................................................................... 12-26

Table 12.4.13 Manufacturer Production Cost Breakdown for Single Package HP Systems 

(2009$)......................................................................................................................... 12-26

Table 12.4.14 Manufacturer Production Cost Breakdown for Non-Weatherized Gas 

Furnace Systems (2009$)............................................................................................. 12-27

Table 12.4.15 Manufacturer Production Cost Breakdown for Mobile Home Furnaces 

Systems (2009$)........................................................................................................... 12-27

Table 12.4.16 Manufacturer Production Cost Breakdown for Oil Furnace Systems 

(2009$)......................................................................................................................... 12-27

Table 12.4.17 Split System Blower Coil and Packaged Air Conditioner Off Mode Power 

Consumption and Cost................................................................................................. 12-28

Table 12.4.18 Coil Only Split System Air Conditioner Off Mode Power Consumption 

and Cost ....................................................................................................................... 12-28

Table 12.4.19 Split System and Packaged Heat Pump Off Mode Power Consumption and 

Cost .............................................................................................................................. 12-28

Table 12.4.20 Non-weatherized Gas, Mobile Home Gas, and Eletric Furnace Standby 

Mode and Off Mode Power Consumption and Cost.................................................... 12-28

Table 12.4.21 Oil-fired Furnace Standby Mode and Off Mode Power Consumption and 

Cost .............................................................................................................................. 12-29

Table 12.4.22 Capital Conversion Costs by Product Class and Efficiency Level (2009$ 

Millions)....................................................................................................................... 12-30

Table 12.4.23 Capital Conversion Costs by Product Class and Trial Standard Level 

(2009$ Millions) .......................................................................................................... 12-30

Table 12.4.24 Product Conversion Costs by Product Class and Efficiency Level (2009$ 

Millions)....................................................................................................................... 12-31

Table 12.4.25 Product Conversion Costs by Product Class and Trial Standard Level 

(2009$ Millions) .......................................................................................................... 12-32

Table 12.4.26 Preservation of EBIT Markups for Split-System Air Conditioners (Coil 

Only) ............................................................................................................................ 12-34

Table 12.4.27 Preservation of EBIT Markups for Split-System Air Conditioners (Blower 

Coil) ............................................................................................................................. 12-34

Table 12.4.28 Preservation of EBIT Markups for Split-System Heat Pumps............. 12-34
12-iv

Table 12.4.29 Preservation of EBIT Markups for Single Package Air Conditioners.. 12-35

Table 12.4.30 Preservation of EBIT Markups for Single Package Heat Pumps......... 12-35

Table 12.4.31 Preservation of EBIT Markups for Non-Weatherized Gas Furnaces... 12-35

Table 12.4.32 Preservation of EBIT Markups for Mobile Home Furnaces................. 12-36

Table 12.4.33 Preservation of EBIT Markups for Oil Furnaces.................................. 12-36

Table 12.4.34 Tiered Markups for Split-System Air Conditioners (Coil Only).......... 12-37

Table 12.4.35 Tiered Markups for Split-System Air Conditioners (Blower Coil)...... 12-37

Table 12.4.36 Tiered Markups for Split-System Heat Pumps..................................... 12-38

Table 12.4.37 Tiered Markups for Single Package Air Conditioners.......................... 12-38

Table 12.4.38 Tiered Markups for Single Package Heat Pumps................................. 12-39

Table 12.4.39 Tiered Markups for Non-Weatherized Gas Furnaces........................... 12-39

Table 12.4.40 Tiered Markups for Mobile Home Furnaces ........................................ 12-39

Table 12.4.41 Tiered Markups for Oil Furnaces.......................................................... 12-40

Table 12.5.1 Changes in Industry Net Present Value for Conventional Products 

(Preservation of EBIT Markup Scenario)*.................................................................. 12-42

Table 12.5.2 Changes in Industry Net Present Value for Conventional Products (Tiered 

Markup Scenario) *...................................................................................................... 12-42

Table 12.5.3 Changes in Industry Net Present Value for Niche Products................... 12-44

Table 12.5.4 Changes in Industry Net Present Value for Niche Products................... 12-44

Table 12.7.1 Potential Changes in the Total Number of Residential Furnace and Central 

Air Conditioners and Heat Pumps Production Workers in 2016................................. 12-51

Table 12.7.2 Other DOE and Federal Actions Affecting the Furnace And Central Air 

Conditioning And Heat Pump Industry ....................................................................... 12-55

Table 12.7.3 Furnace NOx Limits and Compliance Schedule for SCAQMD Rule 111 . 12-

56

Table 12.7.4 NRCan Standards for Residential Boiler Efficiency .............................. 12-58

Table 12.8.1 Summary of Active Mode TSLs*........................................................... 12-59

Table 12.8.2 Summary of Off Mode TSLs (in Watts)................................................. 12-59

Table 12.8.3 Changes in Industry Net Present Value for Conventional Products 

(Preservation of EBIT Markup Scenario)*................................................................... 12-60

Table 12.8.4 Changes in Industry Net Present Value for Conventional Products (Tiered 

Markup Scenario) *

....................................................................................................... 12-60

Table 12.8.5 Changes in Industry Net Present Value for Niche Products................... 12-63

Table 12.8.6 Changes in Industry Net Present Value for Niche Products................... 12-64

Table 12.8.7 Changes in Industry Net Present Value for Niche Products................... 12-67

Table 12.8.8 Changes in Industry Net Present Value for Niche Products................... 12-68

LIST OF FIGURES

Figure 12.5.1 Annual Industry Net Cash Flows for Conventional Products (Preservation 

of EBIT Markup Scenario) .......................................................................................... 12-43

Figure 12.4.1 Using the GRIM to Calculate Cash Flow.............................................. 12-15

Figure 12.5.2 Annual Industry Net Cash Flows for Conventional Products (Tiered 

Markup Scenario)......................................................................................................... 12-43

Figure 12.5.3 Annual Industry Net Cash Flows for Niche Products........................... 12-45
12-v

Figure 12.5.4 Annual Industry Net Cash Flows for Niche Products........................... 12-46
12-6

CHAPTER 12. MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

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

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

manufacturers and on the consumers of the products subject to such a standard.” (42 

U.S.C. 6313(a)(6)(B)(i)) The law also calls for an assessment of the impact of any 

lessening of competition as determined in writing by the Attorney General. Id.

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

the MIA primarily relies on the Government Regulatory Impact Model (GRIM), an 

industry cash-flow model adapted for each product in this rulemaking. The GRIM inputs 

include information on industry cost structure, shipments, and pricing strategies. The 

GRIM’s key output is the industry net present value (INPV). The model estimates the 

financial impact of more stringent energy conservation standards for each product by 

comparing changes in INPV between a base case and the various trial standard levels 

(TSLs) in the standards case. The qualitative part of the MIA addresses product 

characteristics, manufacturer characteristics, market and product trends, as well as the 

impact of standards on subgroups of manufacturers. 

DOE 

conducted a manufacturer impact analysis (MIA) to estimate the financial impact of 

amended energy conservation standards on manufacturers of residential refrigerators, 

freezers, and refrigerator-freezers, and assessed the impact of such standards on direct 

employment and manufacturing capacity. 

12.2 METHODOLOGY

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

preparing an industry characterization for the furnace and central air conditioner and heat 

pump industry, including data on market share, sales volumes and trends, pricing, 

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

GRIM to assess the impacts of amended energy conservation standards on manufacturers.

Additionally, DOE developed an interview guide to gather information on the potential 

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

manufacturers representing a broad cross-section of the HVAC industry. Using 

information from phase II and from the interviews, DOE refined its analysis in the 

GRIM, developed additional analyses for sub-groups that required special consideration, 

and incorporated qualitative data from interviews into its analysis.
12-7

In Phase II, DOE used the GRIM to analyze seven major product types for this 

rulemaking:

1) Split System Air Conditioner 

2) Split System Heat Pump 

3) Single Package Air Conditioner

4) Single Package Heat Pump

5) Non-Weatherized Gas Furnace

6) Mobile Home Furnace

7) Oil Furnace

8) Electric Furnaces

No GRIM is provided for weatherized gas furnaces or space constrained air 

conditioners and heat pumps because the current energy conservation standard was 

determined to be equal to the max-tech efficiency level in the engineering analysis. Based 

on DOE’s screening analysis, teardown analysis, and market research, DOE determined it 

would be unable to raise the energy conservation standards on these products due to the 

state of technology and the design constraints inherent to these products. Therefore, DOE 

concluded that there is no need to perform a manufacturer impact analysis for these 

products given that the current standard already meets the max-tech efficiency. Also, no 

GRIM is provided for the small-duct, high-velocity product class. Due to the small size of 

the SDHV industry and the limited amount of published information, DOE had 

insufficient content to perform a quantitative analysis using the GRIM.

12.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE prepared a profile of the furnace and central air 

conditioning and heat pump industry that built upon the market and technology 

assessment prepared for this rulemaking (refer to chapter 3 of the Technical Support 

Document). Before initiating the detailed impact studies, DOE collected information on 

the present and past structure and market characteristics of the HVAC industry. This 

information included market share data, product shipments, manufacturer markups, and 

the cost structure for various manufacturers. The industry profile includes: (1) further 

detail on the overall market and product characteristics; (2) estimated manufacturer 

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

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

trends in the number of firms, market, and product characteristics. The industry profile 

included a top-down cost analysis of furnace and central air conditioning and heat pump

manufacturers that DOE used to derive the preliminary financial inputs for the GRIM 

(e.g.

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

the furnace and central air conditioner and heat pump industries, including Securities and 

Exchange Commission (SEC) 10–K reports,

, revenues, depreciation, SG&A, and research and development (R&D) expenses).

1 Standard & Poor’s (S&P) stock reports,2

Dun and Bradstreet (D&B) company profiles,3 corporate annual reports, and the U.S. 

Census Bureau’s 2006 Annual Survey of Manufacturers (2006 ASM).4 DOE also
12-8

characterized these industries using information from its engineering analysis and the 

life-cycle cost analysis.

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

Phase II focused on the financial impacts of potential amended energy 

conservation standards on manufacturers of furnace and central air conditioning and heat 

pump products. More stringent energy conservation standards can affect manufacturer 

cash flows in three distinct ways: (1) create a need for increased investment, (2) raise 

production costs per unit, and (3) alter revenue due to higher per-unit prices and/or 

possible changes in sales volumes. To quantify these impacts, DOE used the GRIM to 

perform a cash-flow analysis for furnace and central air conditioning and heat pump 

manufacturers. In performing these analyses, DOE used the financial values derived 

during Phase I and the shipment scenarios used in the NIA. In Phase II, DOE performed 

these preliminary industry cash-flow analyses and prepared written guides for 

manufacturer interviews.

In Phase II, DOE grouped the cash flow results for product classes made by the 

same manufacturers to allow DOE to better assess the impacts of amended energy 

conservation standards on manufacturers. DOE presented the MIA cash flow results for 

this rulemaking in two groupings: conventional products and niche products. 

Conventional products consisted of the split-system air conditioning, split-system heat 

pump, single package air conditioning, single package heat pump, and non-weatherized 

gas furnace product classes. Niche product classes include oil-fired furnaces and mobile 

home furnaces. Each of the two groups of product classes and results were based on a 

unique set of considered TSLs. These TSLs are described in section 12.4.5 below. As 

discussed earlier, DOE performed a qualitative analysis of the remaining small-duct, 

high-velocity product class.

12.2.2.1 Industry Cash-Flow Analysis

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

the announcement year of amended energy conservation standards until thirty years after 

the standards’ compliance date. These factors include annual expected revenues, costs of 

goods sold, SG&A, taxes, and capital expenditures related to the amended standards. 

Inputs to the GRIM include manufacturing production costs, markup assumptions, and 

shipments forecasts developed in other analyses. DOE derived the manufacturing costs 

from the engineering analysis and information provided by the industry and estimated 

typical manufacturer markups from public financial reports and interviews with 

manufacturers. DOE developed alternative markup scenarios for each GRIM based on 

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

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

parameters were developed using publicly available manufacturer data and were revised 

with information submitted confidentially during manufacturer interviews. The GRIM 

results are compared to base case projections for the industry. The financial impact of 

amended energy conservation standards is the difference between the discounted annual 

cash flows in the base case and standards case at each TSL.
12-9

12.2.2.2 Interview Guides

During Phase III of the MIA, DOE interviewed manufacturers to gather 

information on the effects of amended energy conservation on revenues and finances, 

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

DOE distributed an interview guide to interviewees. The interview guide provided a 

starting point for identifying relevant issues and impacts of amended energy conservation 

standards on individual manufacturers or subgroups of manufacturers. Most of the 

information received from these meetings is protected by non-disclosure agreements and 

resides with DOE’s contractors. The MIA interview topics included (1) key issues to this 

rulemaking; (2) a company overview and organizational characteristics; (3) engineering 

and life cycle cost analysis follow-up; (4) manufacturer markups and profitability; (5) 

shipment projections and market shares; (6) financial parameters; (7) conversion costs; 

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

exports, foreign competition, and outsourcing; (11) consolidation; and (12) impacts on 

small businesses.

12.2.3 Phase III: Subgroup Analysis

In Phase III, “Subgroup Impact Analysis,” DOE interviewed manufacturers 

representing approximately 75 percent of furnace and central air conditioning sales. 

Small and large companies, subsidiaries and independent firms, and public and private 

corporations were interviewed to provide a representative cross-section of the HVAC 

industry. The interviews provided DOE with valuable information for evaluating the 

impacts of amended energy conservation standards on manufacturer cash flows, 

investment requirements, and employment. Using information from phase II and from the 

interviews, DOE refined its analysis for the product classes included in the GRIM. 

Additionally, DOE performed qualitative analyses on niche products that were not 

incorporated into the GRIM and on sub-groups that required special consideration.

12.2.3.1 Manufacturing Interviews

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

Phase II are supplemented with information gathered from manufacturer interviews in 

Phase III. The interview process provides an opportunity for interested parties to express 

their views on important issues privately, allowing confidential or sensitive information 

to be considered in the rulemaking process. DOE sought to obtain feedback from industry 

on the approaches used in the GRIMs and to isolate key issues and concerns. 

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

characteristics of each product group. Within each product group, DOE contacted 

companies from its database of manufacturers. Interviews were scheduled well in 

advance to provide every opportunity for key individuals to be available for comment. 

Although a written response to the questionnaire was acceptable, DOE sought interactive 

interviews, which help clarify responses and identify additional issues. The resulting 

information provides valuable inputs to the GRIM developed for the product classes.
12-10

During interviews, DOE defined two manufacturer subgroups (small businesses 

and SDHV manufacturers) that could be disproportionately impacted by amended energy 

conservation standards. These subgroups are described in detail in section 12.2.3.3 below. 

12.2.3.2 Revised Industry Cash-Flow Analysis

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

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

comments on the values it selected for the parameters. DOE revised its industry cashflow model based on this feedback. Section 12.4.3 provides more information on how 

DOE calculated the parameters.

12.2.3.3 Manufacturer Subgroup Analysis 

Using average cost assumptions to develop an industry-cash-flow estimate may 

not adequately assess differential impacts of amended energy conservation standards 

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

manufacturers exhibiting a cost structure that largely differs from the industry average 

could be more negatively affected. To address this possible impact, DOE used the results 

of the industry characterization analysis in Phase I to group manufacturers that exhibit 

similar characteristics. As described in section 12.2.3, DOE presents the industry impacts 

by grouping conventional and niche products separately. These product groupings 

represent markets that are served by the same manufacturers. By segmenting the results 

into these product types, DOE is able to discuss how these subgroups of manufacturers 

will be impacted by amended energy conservation standards. Grouping these product 

categories reduced the need for a subgroup analysis because the impacts of each group 

are characterized by the MIA separately.

12.2.3.3.1 Small-Business Manufacturer Subgroup

DOE investigated whether small business manufacturers should be analyzed as a 

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

business size standards published on August 22, 2008, as amended, and the North 

American Industry Classification System (NAICS) code, presented in Table 12.2.1 , to 

determine whether any small entities would be affected by the rulemaking.5 For the 

product classes under review, the SBA bases its small business definition on the total 

number of employees for a business, its subsidiaries, and its parent companies. An 

aggregated business entity with fewer employees than the listed limit is considered a 

small business.
12-11

Table 12.2.1 SBA and NAICS Classification of Small Businesses Potentially Affected 

by This Rulemaking

Industry Description Revenue Limit Employee Limit NAICS

Air-conditioning and Warm Air Heating 

Equipment and Commercial and Industrial 

Refrigeration Equipment Manufacturing

N/A 750 333415

DOE used publicly available and proprietary information to identify potential 

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

directories (including AHRI), product databases (e.g., AHRI Directory, the SBA 

Database), individual company websites, and market research tools (e.g.

Based on this analysis DOE identified five furnace companies and four companies 

that manufacture central air conditioning and heat pump products as small businesses 

under SBA guidelines. DOE attempted to contact the small businesses to solicit feedback 

on the potential impacts of energy conservation standards. The businesses replied with 

varying amounts of information in written responses and/or interviews. In addition to 

posing a subset of modified MIA interview questions, DOE solicited data on differential 

impacts these companies might experience from amended energy conservation standards.

Based on these interviews and industry research, DOE reports the potential impacts of 

this rulemaking on small manufacturers in section 12.6.

, Dunn and 

Bradstreet reports) to create a list of every company that manufactures or sells products 

covered by this rulemaking. DOE also asked stakeholders and industry representatives if 

they were aware of any other small manufacturers during manufacturer interviews and at 

previous DOE public meetings. DOE screened out companies that did not offer products 

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

foreign owned and operated. 

12.2.3.3.2 SDHV Subgroup

DOE had insufficient information on the small duct, high velocity industry to 

build a shipments forecast model. As a result, it was not possible to perform a 

quantitative analysis using the GRIM for this product class. However, DOE did 

investigate the industry and interview manufacturers of this product class. As part of this 

rulemaking, DOE has performed a qualitative analysis to understand the potential impacts 

of an amended energy conservation standard on manufacturers of SDHV products.

12.2.3.4 Manufacturing Capacity Impact

One significant outcome of amended energy conservation standards could be the 

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

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

amended standards on manufacturing capacity, specifically capacity utilization and plant 

location decisions in the United States and North America, with and without amended 

standards; the ability of manufacturers to upgrade or remodel existing facilities to 

accommodate the new requirements; the nature and value of any stranded assets; and 

estimates for any one-time changes to existing plant, property, and equipment (PPE). 

DOE’s estimates of the one-time capital changes and stranded assets affect the cash flow 
12-12

estimates in the GRIM. These estimates can be found in section Error! Reference 

source not found.; DOE’s discussion of the capacity impact can be found in section 

12.7.2.

12.2.3.5 Employment Impact 

The impact of amended energy conservation standards on employment is an 

important consideration in the rulemaking process. To assess how domestic direct 

employment patterns might be affected, the interviews explored current employment 

trends in the residential HVAC industry. The interviews also solicited manufacturer 

views on changes in employment patterns that may result from more stringent standards. 

The employment impacts section of the interview guide focused on current employment 

levels associated with manufacturers at each production facility, expected future 

employment levels with and without amended energy conservation standards, and 

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

employment impacts are reported in section 12.7.1. 

12.2.3.6 Cumulative Regulatory Burden

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

energy conservation standards and other regulatory actions affecting the same products. 

DOE analyzed the impact on manufacturers of multiple, product-specific regulatory 

actions. Based on its own research and discussions with manufacturers, DOE identified 

regulations relevant to furnace and central air conditioning and heat pump products, such 

as State regulations and other Federal regulations that impact other products made by the 

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

section 12.7.3. 

12.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES

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

regarding the energy conservation standard rulemaking?” This question prompts 

manufacturers to identify the issues they feel DOE should explore and discuss further 

during the interview. The following sections describe the most significant issues 

identified by manufacturers. These summaries are provided in aggregate to protect 

manufacturer confidentiality. 

12.3.1 Adoption of Consensus Agreement

All manufacturers interviewed either strongly supported or were amenable to the 

consensus agreement that was proposed and signed by a number of manufacturers, 

advocacy organizations, and trade groups. Most interviewees were signatories and urged 

the Department to act as quickly as possible to adopt the consensus agreement. 

Manufacturers indicated that the consensus agreement provides regulatory certainty, 

manageable conversion costs, and accelerated compliance dates that provide energy 

savings earlier than would otherwise be achieved. Due to the tight timelines outlined in 

the agreement, manufacturers stated their desire for DOE to adopt the agreement as soon 
12-13

as possible in order to have sufficient time to meet the agreement’s energy conservation 

standards and associated compliance dates.

12.3.2 Potential for Significant Changes to Manufacturing Facilities

During interviews, several manufacturers indicated that central air conditioning 

and heat pump conversion costs are not linear, but would step up dramatically at various 

efficiency levels. In general, manufacturers were concerned that a national baseline 

energy conservation standard above 14 SEER for split-system air conditioning and splitsystem heat pumps would require extensive and costly product line redesigns. At various 

higher efficiency levels, system designs would have to incorporate additional or more 

complex technologies, including two-stage compressors, ECM fan motors, and larger 

heater exchangers. Therefore, to reach higher levels, units would have to increase in size, 

necessitating larger cabinet sizes and the purchase of new equipment and tooling. Several 

large manufacturers indicated that offshore production or completely new production 

facilities would be considered above 14 SEER due to the scope of changes required to 

meet an amended standard. Manufacturer estimates for the total investment required to 

meet national standards in the 14.5 to 16 SEER range varied widely, often depending on 

the current state of each manufacturer’s production lines and whether a completely new 

production facility was required.

12.3.3 Increase in Product Repair and Migration to Alternative Products 

Several manufacturers noted that the higher cost of more-efficient systems 

resulting from amended energy conservation standards would need to be passed on to 

consumers, absorbed by manufacturers, or some combination of both. If manufacturers 

were to attempt to pass on higher costs, the industry is concerned higher prices would 

result in consumers pursing lower-cost, less-efficient alternatives. Manufacturers believe 

that consumers, facing higher first costs, would be more likely to repair older, lessefficient heating and cooling systems rather than replace those units with new, moreefficient models. Similarly, manufacturers expressed concern that consumers would be 

more likely to switch to lower up-front cost, lower-efficiency technologies such as room 

air conditioners and electric space heaters. Manufacturers agreed that these alternatives 

would reduce energy savings and reduce energy conserved.

As evidence, manufacturers cited market trends following the 2006 compliance 

date of the 2001 central air conditioners and heat pump energy conservation rulemaking. 

Since 2006, manufacturers have noted a decline in central air conditioner and heat pump 

sales coupled with an increase in room air conditioner sales and an increase in orders for 

repair components. In general, the manufacturers are concerned that the decline in 

shipments from 2006 to 2010 will continue, and that a revised energy conservation 

standard will exacerbate the decline in unitary air conditioner shipments.

12.3.4 HFC Phase Out Legislation 

Manufacturers expressed strong concerns about legislation proposed in Congress 

that would phase out HFC refrigerants, including R-410A and R-134a. Any phase-out 
12-14

would require extensive redesign of all central air conditioners and heat pump products to 

make use of an alternative refrigerant. Manufacturers asserted that there is no clear 

replacement for HFC refrigerants today. Without a clear replacement, the manufacturers 

stated that any phase-out would create a period of uncertainty as the industry identifies 

suitable alternatives and then redesigns products around the replacement. It is unclear 

what efficiency levels could be achieved at reasonable cost without HFC refrigerants. 

Manufacturers observed that past phase-outs generally have led to more-expensive and 

less-efficient refrigerant replacements. Additionally, manufacturers stated that alternative 

refrigerants may require substantially larger systems to achieve the same levels of 

performance.

12.3.5 Physical Constraints 

Multiple manufacturers expressed concern that an increase in appliance efficiency 

standards would leave older homes, and multi-family homes in particular, with few costeffective options for replacing their cooling systems. As the efficiency of air conditioning 

increases, the physical sizes of the units also increase. Manufacturers are concerned 

because central air conditioner and heat pump units are already so large that they can be 

difficult to fit into some end-user homes. Attic entry ways, basement doors, and 

condensing unit pads all present physical constraints when replacing an air conditioner 

with a larger, more-efficient system. Multifamily homes are particularly restricted due to 

the limited space in utility closets and due to the limited options for renovation. These 

physical constraints lead to higher installation costs, which may encourage customers to 

repair existing systems rather than replace them.

12.3.6 Supply Chain Constraints

Some manufacturers expressed concern about the impact of more-stringent 

standards on their supply chain. Changes in energy conservation standards could affect 

the competitive positioning and dominance of component suppliers. One manufacturer 

cited the example of the 2001 central air conditioner rulemaking, after which one of two 

critical compressor suppliers nearly went bankrupt (because the change in standards led 

most manufacturers to choose design options that favored the technology of one supplier 

over the other). According to the manufacturer, having the industry rely on a single 

supplier for critical components, even just a few, puts the entire industry at risk.

Additionally, manufacturers stated that more-stringent energy conservation 

standards would increase the demand for some key components over current levels. 

Given that most manufacturers rely on the same set of suppliers, the amended standards 

could lead to long lead times for critical components, such as high-efficiency 

compressors, ECM motors, modulating gas valves, advanced control systems and new

production tooling.

12.4 GRIM INPUTS AND ASSUMPTIONS

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

amended energy conservation standards. DOE relies on several sources to obtain inputs 
12-15

for the GRIM. Data and assumptions from these sources are then fed into an accounting 

model that calculates the industry cash flow both with and without amended energy 

conservation standards.

12.4.1 Overview of the GRIM

The basic structure of the GRIM, illustrated in Figure 12.4.1 , is an annual cash 

flow analysis that uses manufacturer prices, manufacturing costs, shipments, and industry 

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

in costs, investments, and associated margins. The GRIM spreadsheet uses a number of 

inputs to arrive at a series of annual cash flows, beginning with the base year of the 

analysis, 2010, and continuing to 2043. The model calculates the INPV by summing the 

stream of annual discounted cash flows during this period and adding a discounted 

terminal value.

6

Figure 12.4.1 Using the GRIM to Calculate Cash Flow

The GRIM projects cash flows using standard accounting principles and compares 

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

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

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

conservation standard on manufacturers. Appendix 12-A provides more technical details 

and user information for the GRIM.

12.4.2 Sources for GRIM Inputs

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

cash flow. These sources include corporate annual reports, company profiles, Census 

data, credit ratings, the shipments model, the engineering analysis, and the manufacturer 

interviews.

12.4.2.1 Corporate Annual Reports

Corporate annual reports to the SEC (SEC 10-Ks) provided many of the initial 

financial inputs to the GRIM. These reports exist for publicly held companies and are 
12-16

freely available to the general public. DOE developed initial financial inputs to the GRIM 

by examining the annual SEC 10-K reports filed by publicly-traded manufacturers that 

manufacture residential HVAC products and whose combined product range includes 

furnace and central air conditioning and heat pump products. Since these companies do 

not provide detailed information about their individual product lines, DOE used the 

financial information for the entire companies as its initial estimates of the financial 

parameters in the GRIM analysis. These figures were later revised using feedback from 

interviews to be representative of manufacturing for each product grouping. DOE used 

corporate annual reports to derive the following initial inputs to the GRIM:

• Tax rate

• Working capital

• SG&A

• R&D

• Depreciation

• Capital expenditures

• Net PPE

12.4.2.2 Standard and Poor Credit Ratings

S&P provides independent credit ratings, research, and financial information. 

DOE relied on S&P reports to determine the industry’s average cost of debt when 

calculating the cost of capital.

12.4.2.3 Dunn and Bradstreet Reports

D&B provides independent research on company cash flows, revenues, 

employees, and credit-worthiness. Besides conducting manufacturer interviews, DOE 

used D&B reports to profile several manufacturers with the potential to be small 

businesses.

12.4.2.4 Shipment Model

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

the national impact analysis (NIA). The model relied on historical shipments data for 

residential HVAC products. Chapter 9 of the TSD describes the methodology and 

analytical model DOE used to forecast shipments.

12.4.2.5 Engineering Analysis 

During the engineering analysis, DOE used a manufacturing cost model to 

develop MPC estimates for furnace and central air conditioning and heat pump products. 

The analysis provided the labor, materials, overhead, and total production costs for 

products at each efficiency level. The engineering analysis also estimated a manufacturer 

markup and a shipping cost to provide the manufacturer selling price (MSP) for each 

product at every efficiency level. 
12-17

12.4.2.6 Manufacturer Interviews

During the course of the MIA, DOE conducted interviews with a representative 

cross-section of manufacturers. DOE also interviewed manufacturers representing a 

significant portion of sales in every product class. During these discussions, DOE 

obtained information to determine and verify GRIM input assumptions in each industry. 

Key topics discussed during the interviews and reflected in the GRIM include:

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

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

development, testing, and marketing);

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

labor, overhead, and depreciation costs;

• MPCs estimated in the engineering analysis; and

• possible profitability impacts.

12.4.3 Financial Parameters

Table 12.4.1 provides financial parameters for six large companies engaged in 

manufacturing and selling furnace and central air conditioning and heat pump products. 

The values listed are averages over a 5-year period (2004 to 2008).

Table 12.4.1 GRIM Financial Parameters Based on 2004–2008 Weighted Company 

Financial Data

Parameter

IndustryWeighted 

Average

Manufacturers

A B C D E F

Tax Rate 

(% of Taxable Income) 28.3% 27.2% 33.6% 33.3% 18.8% 20.9% 37.5%

Working Capital 

(% of Revenue) 10.2% 7.2% 19.5% 10.2% 12.5% 3.5% 4.4%

SG&A 

(% of Revenue) 14.7% 11.7% 11.1% 23.3% 17.9% 10.0% 18.8%

R&D 

(% of Revenues) 1.9% 3.2% 0.5% 1.2% 1.1% 2.0% N/A

Depreciation 

(% of Revenues) 2.1% 2.3% 2.2% 1.3% 1.6% 2.0% 5%

Capital Expenditures 

(% of Revenues) 1.9% 2.1% 1.6% 1.8% 2.2% 2.2% 1.5%

Net Property, Plant, 

and Equipment 

(% of Revenues) 10.5% 12.1% 9.3% 8.2% 14.8% 12.0% N/A

While most of these companies also manufacturer products not covered by this 

rulemaking, DOE used these parameters as initial estimates. During interviews, 

manufacturers were asked to provide their own figures for the parameters listed in Table 

12.4.2. Where applicable, DOE adjusted the parameters in the GRIM using manufacturer 

feedback and market share information. Table 12.4.2 presents the revised financial 
12-18

parameters. DOE used one set of financial parameters to characterize all product

groupings.

Table 12.4.2 GRIM Revised Furnace And Central Air Conditioning And Heat 

Pump Financial Parameters

Parameter Revised Estimate

Tax Rate (% of Taxable Income) 32.6%

Working Capital (% of Revenue) 9.3%

SG&A (% of Revenue) 13.8%

R&D (% of Revenues) 2.3%

Depreciation (% of Revenues) 1.8%

Capital Expenditures (% of Revenues) 2.2%

Net Property, Plant, and Equipment (% of Revenues) 20.0%

12.4.4 Corporate Discount Rate

DOE used the weighted-average cost of capital (WACC) as the discount rate to 

calculate the INPV. A company’s assets are financed by a combination of debt and 

equity. The WACC is the total cost of debt and equity weighted by their respective 

proportions in the capital structure of the industry. DOE estimated the WACC for the 

residential HVAC industry based on several representative companies, using the 

following formula:

WACC = After-Tax Cost of Debt x (Debt Ratio) + Cost of Equity x (Equity 

Ratio) 

The cost of equity is the rate of return that equity investors (including, potentially, 

the company) expect to earn on a company’s stock. These expectations are reflected in 

the market price of the company’s stock. The capital asset pricing model (CAPM) 

provides one widely used means to estimate the cost of equity. According to the CAPM, 

the cost of equity (expected return) is:

Cost of Equity = Riskless Rate of Return + β x Risk Premium

where:

Riskless rate of return is the rate of return on a “safe” benchmark investment, 

typically considered the short-term Treasury Bill (T-Bill) yield.

Risk premium is the difference between the expected return on stocks and the 

riskless rate.

Beta (β) is the correlation between the movement in the price of the stock and that 

of the broader market. In this case, Beta equals one if the stock is perfectly correlated 
12-19

with the S&P 500 market index. A Beta lower than one means the stock is less volatile 

than the market index.

DOE determined that the industry average cost of equity for the furnace and 

central air conditioning and heat pump industry is 15.9 percent (Table 12.4.3).

Table 12.4.3 Cost of Equity Calculation

Parameter

Industry-Weighted 

Average (%) A C D E

(1) Average Beta 1.3 1.0 0.9 2.0 1.9

(2) Yield on 10-Year

4.23 -

- -

T-Bill (1990-2008) -

(3) Market Risk 

Premium (1926-1999) 9.2 - - - -

Cost of Equity 

(2)+[(1)*(3)] 15.9 - - - -

Equity/Total Capital 60.5 63.0 52.6 70.6 74.6

Bond ratings are a tool to measure default risk and arrive at a cost of debt. Each 

bond rating is associated with a particular spread. One way of estimating a company’s 

cost of debt is to treat it as a spread (usually expressed in basis points) over the risk-free 

rate. DOE used this method to calculate the cost of debt for four public manufacturers by 

using S&P ratings and adding the relevant spread to the risk-free rate. 

In practice, investors use a variety of different maturity Treasury bonds to 

estimate the risk-free rate. DOE used the 10-year Treasury bond return because it 

captures long-term inflation expectations and is less volatile than short-term rates. The 

risk free rate is estimated to be approximately 4.2 percent, which is the average 10-year 

Treasury bond return between 1990 and 2008.

For the cost of debt, S&P’s Credit Services provided the average spread of 

corporate bonds for the five manufacturers for which data was available between 2004 

and 2008. DOE added the industry-weighted average spread to the average T-Bill yield 

over the same period. Since proceeds from debt issuance are tax deductible, DOE 

adjusted the gross cost of debt by the industry average tax rate to determine the net cost 

of debt for the industry. Table 12.4.4 presents the derivation of the cost of debt and the 

capital structure of the industry (i.e. the debt ratio (debt/total capital)).
12-20

Table 12.4.4 Cost of Debt Calculation

Parameter

Industry-Weighted 

Average (%) A B C D E

S&P Bond Rating -- A B+ BB+ BBB BBB

(1) Yield on 10-Year

T-Bill (1990-2008) 4.2 - - - - -

(2) Gross Cost of Debt 6.5 5.8 8.8 7.5 6.8 6.8

(3) Tax Rate 28.3 27.2 33.6 33.3 13.8 20.9

Net Cost of Debt

(2) x ((1)-(3)) 4.6 - - - - -

Debt/Total Capital 39.5 37 51.6 47.4 29.4 25.4

Using public information for these five companies, the initial estimate for the 

industry’s WACC was approximately 11.4 percent. Subtracting an inflation rate of 2.9

percent over the analysis period used in the initial estimate, the inflation-adjusted WACC

and the initial estimate of the discount rate used in the straw-man GRIM is 8.5 percent.

DOE also asked for feedback on the discount rate during manufacturer interviews and 

used this feedback to determine that 8.0 percent was an appropriate discount rate for use 

in the GRIM.

All major manufacturers in the industry produce central air conditioners and heat 

pumps as well as furnaces, so DOE considers the use of one discount rate appropriate for 

both the heating and cooling products. 
12-21

12.4.5 Trial Standard Levels 

DOE developed a number of efficiency levels for each type of equipment. TSLs were then developed by selecting likely 

groupings of efficiency levels for all equipment types. Each TSL includes combinations of efficiency levels representing comparable 

stringency between furnace product classes and central air conditioner and heat pump product classes. Table 12.4.5 presents the 

efficiency levels DOE used in the GRIM for energy efficiency standards analysis. The metric used for furnace equipment is annual 

fuel utilization efficiency (AFUE) and the metric used for central air conditioner and heat pump equipment is seasonal energy 

efficiency rating (SEER). Table 12.4.6 presents the trial standard levels (TSL) used for energy efficiency analysis in the GRIM. Table 

12.4.7 presents the TSLs used for the standby mode and off mode analysis in the GRIM.

Table 12.4.5 Energy Efficiency Levels For Central Air Conditioning and Heat Pump Products (SEER) and Furnace Products 

(AFUE)

Equipment Class Baseline EL1 EL2 EL3 EL4 EL5 EL6 EL7 EL8 EL9 EL10 EL11 EL12 EL13 EL14 EL15

Split System AC - Coil 

Only 13 13.5 14 14.5 15 15.5 16 16.5 17

Split System AC -

Blower Coil 13 13.5 14 14.5 15 15.5 16 16.5 17 18 19 20 21 22 23 24.5

Split System HP -

Blower Coil 13 13.5 14 14.5 15 15.5 16 16.5 17 18 19 20 21 22

Single Package AC 13 13.5 14 14.5 15 15.5 16 16.5

Single Package HP 13 13.5 14 14.5 15 15.5 16 16.5

Non-Weatherized Gas 

Furnace 80 90 92 95 98

Mobile Home Furnace 80 90 92 96

Oil Furnace 82 83 84 85 97
12-22

Table 12.4.6 Trial Standard Levels for Energy Efficiency Analysis of Central Air 

Conditioner and Heat Pump (SEER) and Furnace (AFUE) Products

Equipment Class Baseline TSL1 TSL2 TSL3 TSL4 TSL5 TSL6 TSL7

Split System AC -

Coil Only

13 13.5 13.5 13/14 13/14 13/14 14/15 17

Split System AC -

Blower Coil

13 13.5 13.5 13/14 13/14 13/14 14/15 22

Split System HP -

Blower Coil

13 13.5 13.5 14 14 14 15 21

Single Package AC

13 13 13 14 14 14 15 16.5

Single Package HP

13 13 13 14 14 14 15 16.5

Non-Weatherized Gas 

Furnace

80 80 92/80 90/80 90/80 95/80 95/80 98/98

Mobile Home Furnace

80 80 80/80 90/80 90/80 96/80 96/80 96/96

Oil Furnace

82 82 82 83 83 85 85 97

Table 12.4.7 Trial Standard Levels for Standby Mode and Off Mode Analysis of 

Central Air Conditioner and Heat Pump and Furnace Products (Watts)

Equipment Class TSL 1 TSL 2 TSL 3

Split System AC 36 30 29

Split System HP 33 33 32

Single Package AC 36 30 29

Single Package HP 33 33 32

SDHV 36 30 29

Space Constrained AC 36 30 29

Space Constrained HP 33 33 32

Non-Weatherized Gas Furnace 10 10 9

Oil Furnace 11 11 10

Mobile Home Furnace 10 10 9

Electric Furnace 10 10 9

12.4.6 NIA Shipments

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

forecasts and the distribution of these values by efficiency level. Changes in the 

efficiency mix at each standard level are a key driver of manufacturer finances. For this 

analysis, the GRIM used the NIA shipments forecasts. However, only the shipments in 

2010 and beyond have an impact on INPV because 2010 is the base year to which future 

cash flows are summed. Chapter 9 of the TSD explains DOE’s calculations of total 
12-23

shipments in detail. Table 12.4.8 shows base case shipments forecasted in the shipment 

analysis for furnace and central air conditioning and heat pump products. 

Table 12.4.8 Total Base Case NIA Shipments (in Millions of Units)

Year

Split 

System AC 

- Coil Only

Split 

System AC 

- Blower 

Coil

Split System 

HP - Blower 

Coil

Single 

Package 

AC

Single 

Package 

HP

Non-Weatherized 

Gas Furnace

Mobile 

Home 

Furnace

Oi

Furn

2010 3.74 0.42 1.67 0.42 0.22 2.55 0.12 0.0

2011 3.67 0.41 1.72 0.41 0.22 2.48 0.12 0.0

2012 3.84 0.43 1.82 0.42 0.23 2.60 0.12 0.0

2013 3.93 0.44 1.88 0.43 0.24 2.72 0.12 0.0

2014 4.00 0.44 1.92 0.43 0.24 2.78 0.13 0.0

2015 4.09 0.45 1.98 0.44 0.25 2.85 0.13 0.0

2016 4.18 0.46 2.04 0.44 0.26 2.93 0.14 0.0

2017 4.24 0.47 2.09 0.45 0.26 2.99 0.14 0.0

2018 4.30 0.48 2.13 0.45 0.27 3.05 0.15 0.0

2019 4.37 0.49 2.18 0.46 0.27 3.11 0.15 0.0

2020 4.41 0.49 2.22 0.46 0.28 3.15 0.15 0.0

2021 4.43 0.49 2.24 0.46 0.28 3.17 0.14 0.0

2022 4.46 0.50 2.26 0.46 0.28 3.19 0.14 0.0

2023 4.49 0.50 2.30 0.46 0.28 3.22 0.14 0.0

2024 4.53 0.50 2.33 0.47 0.29 3.25 0.14 0.0

2025 4.58 0.51 2.38 0.47 0.29 3.29 0.14 0.0

2026 4.63 0.51 2.42 0.47 0.30 3.33 0.14 0.0

2027 4.66 0.52 2.45 0.48 0.30 3.35 0.14 0.0

2028 4.68 0.52 2.47 0.48 0.30 3.36 0.14 0.0

2029 4.71 0.52 2.50 0.48 0.31 3.38 0.14 0.0

2030 4.75 0.53 2.54 0.48 0.31 3.41 0.13 0.0

2031 4.79 0.53 2.57 0.49 0.31 3.43 0.13 0.0

2032 4.81 0.53 2.59 0.49 0.32 3.44 0.13 0.0

2033 4.85 0.54 2.63 0.49 0.32 3.46 0.13 0.0

2034 4.89 0.54 2.66 0.50 0.33 3.49 0.13 0.0

2035 4.93 0.55 2.70 0.50 0.33 3.52 0.13 0.0

2036 4.97 0.55 2.73 0.50 0.33 3.55 0.13 0.0

2037 5.01 0.56 2.77 0.51 0.34 3.58 0.13 0.0

2038 5.05 0.56 2.80 0.51 0.34 3.61 0.13 0.0

2039 5.09 0.57 2.84 0.51 0.35 3.64 0.13 0.0

2040 5.13 0.57 2.87 0.52 0.35 3.67 0.13 0.0

2041 5.17 0.57 2.91 0.52 0.35 3.70 0.13 0.0

2042 5.21 0.58 2.94 0.52 0.36 3.73 0.13 0.0

2043 5.25 0.58 2.97 0.53 0.36 3.76 0.13 0.0

2044 5.29 0.59 3.01 0.53 0.37 3.79 0.13 0.0
12-24

2045 5.33 0.59 3.04 0.53 0.37 3.82 0.13 0.0

*Electric furnace shipments were used for standby mode and off mode analysis 

12.4.6.1 Shipments Forecast

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

distribution by efficiency level for furnace and central air conditioning and heat pump 

products. In the standards case, DOE determined efficiency distributions for cases in 

which a potential standard applies for the effective year and beyond.

For the energy efficiency analysis, DOE assumed that product efficiencies in the 

base case that did not meet the standard under consideration would roll up to meet the 

new standard in the year of the effective date. DOE further assumed that the ENERGY 

STAR program will continue to promote high-efficiency appliances after revised

standards are introduced, and that product market shares above a given standard level 

may shift. The shipment forecasts also account for possible product switching that may 

occur between split-system air conditioning, split-system heat pumps, non-weatherized 

gas furnaces, and electric furnaces. The product switching calculations incorporate 

considerations of consumer climate zones, existing equipment, equipment costs, and 

installation costs.

For the standby mode and off mode analysis, DOE assumed that standby features 

and off mode features along would not alter shipments from the base case. As described 

in section12.4.7, the changes required by standby mode and off mode standards were 

assumed to have very mild pricing impacts. As a result, DOE anticipates shipment 

distributions in the standards case to be similar to the base case when considering standby 

mode and off mode impacts separately from energy efficiency standard impacts.

12.4.7 Production Costs

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

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

5 of the TSD). For the MIA, DOE used the manufacturer production costs (MPCs)

derived in the engineering analysis. While the engineering analysis included MPCs for 

varying capacity units, DOE primarily relied on the production costs for three ton units 

for central air conditioner and heat pump products, for 80,000 BTU capacity units for gas 

furnaces, and 105,000 BTU capacity units for oil furnaces.

The GRIM also relied on the engineering analysis to determine labor, materials, 

overhead, and depreciation (depreciation and factory overhead) percentages that make up 

the full MPC. For the MPC breakdown in the MIA, DOE developed different 

depreciation values for each product type by using a deprecation value that is consistent 

with historical information in SEC 10-Ks. The remainder of total overhead was allocated 

to factory overhead. 

To calculate baseline manufacturer selling prices (MSP), DOE followed a three 

step process. First, DOE derived MPCs from the engineering and tear down analyses.
12-25

Second, DOE applied a manufacturer markup, which varies with the markup scenario 

(which is discussed in detail in section 12.4.10). Finally, an estimate shipping cost is 

added to the marked up costs to arrive at the MSP.

Table 12.4.10 through Table 12.4.13 show the production cost estimates used in 

the GRIM for each analyzed product class. A flat markup of 1.3 is used in these tables.

Table 12.4.9 Manufacturer Production Cost Breakdown for Split AC – Coil Only 

Systems (2009$)

SEER Labor Material Overhead Depreciation Total Markup Shipping MSP

Baseline 13 $63.77 $535.78 $23.77 $18.67 $642.00 1.30 $20.51 $855.11

EL 1 13.5 $66.55 $559.15 $24.81 $19.48 $670.00 1.30 $22.62 $893.62

EL 2 14 $70.13 $589.19 $26.14 $20.53 $706.00 1.30 $24.83 $942.63

EL 3 14.5 $74.40 $625.08 $27.74 $21.78 $749.00 1.30 $24.16 $997.86

EL 4 15 $79.47 $667.64 $29.62 $23.26 $800.00 1.30 $25.40 $1,065.40

EL 5 15.5 $85.33 $716.88 $31.81 $24.98 $859.00 1.30 $26.73 $1,143.43

EL 6 16 $91.98 $772.80 $34.29 $26.93 $926.00 1.30 $28.10 $1,231.90

EL 7 16.5 $99.43 $835.39 $37.07 $29.11 $1,001.00 1.30 $28.90 $1,330.20

EL 8 17 $107.68 $904.65 $40.14 $31.52 $1,084.00 1.30 $30.74 $1,439.94

Table 12.4.10 Manufacturer Production Cost Breakdown for Split AC – Coil &

Blower Systems (2009$)

SEER Labor Material Overhead Depreciation Total Markup Shipping Price

Baseline 13 $81.85 $687.69 $30.51 $23.96 $824.03 1.30 $24.89 $1,096.12

EL 1 13.5 $85.22 $715.97 $31.77 $24.95 $857.91 1.30 $26.95 $1,142.23

EL 2 14 $88.66 $744.85 $33.05 $25.96 $892.52 1.30 $29.11 $1,189.38

EL 3 14.5 $92.17 $774.37 $34.36 $26.98 $927.89 1.30 $29.55 $1,235.80

EL 4 15 $95.76 $804.55 $35.70 $28.04 $964.05 1.30 $28.81 $1,282.08

EL 5 15.5 $99.44 $835.43 $37.07 $29.11 $1,001.05 1.30 $29.76 $1,331.13

EL 6 16 $103.20 $867.04 $38.47 $30.21 $1,038.93 1.30 $30.75 $1,381.35

EL 7 16.5 $107.05 $899.41 $39.91 $31.34 $1,077.71 1.30 $32.02 $1,433.05

EL 8 17 $111.00 $932.57 $41.38 $32.50 $1,117.45 1.30 $33.35 $1,486.03

EL 9 18 $119.20 $1,001.41 $44.43 $34.90 $1,199.93 1.30 $35.23 $1,595.14

EL 10 19 $127.82 $1,073.83 $47.65 $37.42 $1,286.71 1.30 $37.03 $1,709.75

EL 11 20 $136.90 $1,150.13 $51.03 $40.08 $1,378.14 1.30 $38.91 $1,830.50

EL 12 21 $146.48 $1,230.62 $54.61 $42.88 $1,474.59 1.30 $42.26 $1,959.22

EL 13 22 $156.60 $1,315.63 $58.38 $45.84 $1,576.45 1.30 $44.71 $2,094.09

EL 14 23 $169.12 $1,420.88 $63.05 $49.51 $1,702.56 1.30 $46.36 $2,259.69

EL 15 24.5 $182.65 $1,534.55 $68.09 $53.47 $1,838.77 1.30 $46.75 $2,437.15
12-26

Table 12.4.11 Manufacturer Production Cost Breakdown for Split System HP 

(2009$)

SEER Labor Material Overhead Depreciation Total Markup Shipping Price

Baseline 13 $97.77 $821.44 $36.45 $28.62 $984.28 1.30 $28.64 $1,308.2

EL 1 13.5 $102.32 $859.66 $38.15 $29.96 $1,030.09 1.30 $29.58 $1,368.6

EL 2 14 $106.84 $897.61 $39.83 $31.28 $1,075.56 1.30 $30.54 $1,428.7

EL 3 14.5 $111.33 $935.34 $41.50 $32.59 $1,120.77 1.30 $33.50 $1,490.5

EL 4 15 $115.80 $972.91 $43.17 $33.90 $1,165.78 1.30 $35.40 $1,550.9

EL 5 15.5 $120.26 $1,010.37 $44.83 $35.21 $1,210.67 1.30 $34.70 $1,608.5

EL 6 16 $126.71 $1,064.52 $47.24 $37.09 $1,275.56 1.30 $34.09 $1,692.32

EL 7 16.5 $131.21 $1,102.36 $48.91 $38.41 $1,320.90 1.30 $35.40 $1,752.5

EL 8 17 $135.72 $1,140.20 $50.59 $39.73 $1,366.24 1.30 $36.72 $1,812.8

EL 9 18 $144.77 $1,216.27 $53.97 $42.38 $1,457.39 1.30 $39.52 $1,934.12

EL 10 19 $153.91 $1,293.05 $57.38 $45.06 $1,549.39 1.30 $41.64 $2,055.84

EL 11 20 $158.54 $1,331.95 $59.10 $46.41 $1,657.88 1.30 $42.14 $2,197.3

EL 12 21 $171.22 $1,438.50 $63.83 $50.13 $1,764.08 1.30 $42.39 $2,335.6

EL 13 22 $184.92 $1,553.58 $68.94 $54.14 $1,870.00 1.30 $42.39 $2,473.3

Table 12.4.12 Manufacturer Production Cost Breakdown for Single Package AC 

Systems (2009$)

Single 

Package 

AC SEER Labor Material Overhead Depreciation Total Markup Shipping Price

Baseline 13 $95.50 $802.37 $35.60 $27.96 $961.44 1.30 $30.43 $1,280.30

EL 1 13.5 $101.62 $853.77 $37.88 $29.75 $1,023.03 1.30 $32.13 $1,362.08

EL 2 14 $106.32 $893.20 $39.63 $31.12 $1,070.27 1.30 $33.89 $1,425.24

EL 3 14.5 $114.31 $960.35 $42.61 $33.46 $1,150.74 1.30 $35.69 $1,531.66

EL 4 15 $122.28 $1,027.28 $45.58 $35.80 $1,230.94 1.30 $37.55 $1,637.77

EL 5 15.5 $131.29 $1,103.01 $48.94 $38.44 $1,321.68 1.30 $39.47 $1,757.65

EL 6 16 $140.52 $1,180.55 $52.38 $41.14 $1,414.59 1.30 $41.44 $1,880.41

EL 7 16.5 $156.48 $1,314.61 $58.33 $45.81 $1,575.22 1.30 $43.88 $2,091.67

Table 12.4.13 Manufacturer Production Cost Breakdown for Single Package HP 

Systems (2009$)

Single 

Package 

HP SEER Labor Material Overhead Depreciation Total Markup Shipping Price

Baseline 13 $117.68 $988.70 $43.87 $34.45 $1,184.71 1.30 $31.88 $1,572.01

EL 1 13.5 $121.88 $1,023.95 $45.43 $35.68 $1,226.94 1.30 $33.38 $1,628.40

EL 2 14 $129.52 $1,088.12 $48.28 $37.92 $1,303.84 1.30 $34.91 $1,729.90
12-27

EL 3 14.5 $139.30 $1,170.34 $51.93 $40.78 $1,402.36 1.30 $36.48 $1,859.55

EL 4 15 $149.05 $1,252.20 $55.56 $43.63 $1,500.44 1.30 $38.08 $1,988.66

EL 5 15.5 $160.11 $1,345.17 $59.69 $46.87 $1,611.84 1.30 $39.72 $2,135.11

EL 6 16 $175.01 $1,470.32 $65.24 $51.24 $1,761.80 1.30 $41.39 $2,331.74

EL 7 16.5 $190.20 $1,597.98 $70.91 $55.68 $1,914.77 1.30 $42.75 $2,531.96

Table 12.4.14 Manufacturer Production Cost Breakdown for Non-Weatherized Gas 

Furnace Systems (2009$)

AFUE Labor Material Overhead Depreciation Total Markup Shipping Price

Baseline 80 $22.33 $225.87 $11.13 $7.07 $266.40 1.30 $10.06 $356.38

EL 1 90 $29.70 $300.92 $14.62 $10.42 $355.65 1.30 $10.06 $472.41

EL 2 92 $34.03 $323.97 $15.90 $11.33 $385.24 1.30 $10.06 $510.87

EL 3 95 $35.83 $371.78 $18.22 $11.11 $436.94 1.30 $10.06 $578.09

EL 4 98 $35.71 $425.49 $19.53 $10.28 $491.01 1.30 $10.06 $648.37

Table 12.4.15 Manufacturer Production Cost Breakdown for Mobile Home 

Furnaces Systems (2009$)

AFUE Labor Material Overhead Depreciation Total Markup Shipping Price

Baseline 80 $28.05 $243.89 $12.66 $12.68 $297.27 1.30 $18.68 $405.13

EL 1 90 $32.35 $330.91 $15.95 $11.59 $390.79 1.30 $10.06 $518.09

EL 2 92 $33.87 $357.62 $17.72 $12.02 $421.23 1.30 $10.06 $557.66

EL 3 96 $41.23 $401.65 $19.26 $12.29 $474.44 1.30 $10.06 $626.83

Table 12.4.16 Manufacturer Production Cost Breakdown for Oil Furnace Systems 

(2009$)

AFUE Labor Material Overhead Depreciation Total Markup Shipping Price

Baseline 82 $68.73 $646.18 $47.73 $46.73 $809.36 1.30 $19.69 $1,071.86

EL 1 83 $69.40 $652.48 $48.19 $47.18 $817.25 1.30 $19.69 $1,082.12

EL 2 84 $70.13 $659.35 $48.70 $47.68 $825.85 1.30 $19.69 $1,093.29

EL 3 85 $70.92 $666.78 $49.25 $48.21 $835.16 1.30 $19.69 $1,105.39

EL 4 97 $71.17 $832.09 $54.57 $44.47 $1,002.30 1.30 $19.69 $1,322.68

12.4.8 Incremental Manufacturer Production Costs for Standby Mode and Off 

Mode

To analyze the impact of standby mode and off mode standards, DOE considered 

the incremental MPC of standby mode and off mode design options in the standards case.

The design options were derived from the engineering analysis, as enumerated in section 
12-28

IV.C.7 of the Direct Final Rule notice and chapter 5 of the TSD. The cost of these design 

options are listed below in Table 12.4.17 through Table 12.4.21.

Table 12.4.17 Split System Blower Coil and Packaged Air Conditioner Off Mode 

Power Consumption and Cost

MPC with an 

ECM Motor and 

Crankcase Heater

($)

Power Consumption 

with an ECM Motor 

and Crankcase Heater

(W)

MPC with an ECM

Motor and No 

Crankcase Heater ($)

Power Consumption 

with an ECM Motor 

and No Crankcase 

Heater (W)

Baseline 8.06 48.0 6.56 11.0

EL1 11.82 35.5 17.58 10.2

EL 2 46.20 30.3

EL 3 57.22 29.5

Table 12.4.18 Coil Only Split System Air Conditioner Off Mode Power 

Consumption and Cost

MPC with a 

Crankcase Heater

($)

Power Consumption 

with a Crankcase 

Heater (W)

MPC with No Crankcase 

Heater ($)

Power Consumption 

with No Crankcase 

Heater (W)

Baseline 3.64 37.0 0 0

EL1 7.40 24.5

EL 2 24.24 19.3

Table 12.4.19 Split System and Packaged Heat Pump Off Mode Power Consumption 

and Cost

MPC with an 

ECM Motor and 

Crankcase Heater

($)

Power Consumption 

with an ECM Motor 

and Crankcase Heater

(W)

MPC with an ECM 

Motor and No Crankcase 

Heater ($)

Power Consumption 

with an ECM Motor 

and No Crankcase 

Heater (W)

Baseline 8.06 51.0 6.56 14.0

EL1 11.82 32.5 17.58 13.2

EL 2 22.84 31.7

Table 12.4.20 Non-weatherized Gas, Mobile Home Gas, and Eletric Furnace 

Standby Mode and Off Mode Power Consumption and Cost

Description Standby Mode and Off Mode 

Power Consumption (W) MPC ($)

Baseline 11.0 0

EL1 Switching Mode Power Supply 9.8 7.25

EL 2 Switching Mode Power Supply and 

Toroidal Transformer 9.0 18.20
12-29

Table 12.4.21 Oil-fired Furnace Standby Mode and Off Mode Power Consumption 

and Cost

Description Standby Mode and Off Mode 

Power Consumption (W) MPC ($)

Baseline 12.0

EL1 Switching Mode Power Supply 10.8 7.25

EL 2 Switching Mode Power Supply and 

Toroidal Transformer 10.0 18.20

12.4.9 Conversion Costs

Amended energy conservation standards typically cause manufacturers to incur 

one-time conversion costs to bring their production facilities and product designs into 

compliance with new regulations. For the MIA, DOE classified these one-time 

conversion costs into two major groups: capital conversion costs and product conversion 

costs. Capital conversion costs are one-time investments in plant, property, and 

equipment to adapt or change existing production facilities in order to fabricate and 

assemble new product design that comply with amended energy conservation standards. 

Product conversion costs are one-time investments in research, development, testing, 

marketing and other costs to make product designs comply with amended energy 

conservation standards. 

12.4.9.1 Capital Conversion Costs

DOE based its estimates of the capital conversion costs that would be required to 

meet each TSL on information obtained from manufacturer interviews, the design 

pathways analyzed in the engineering analysis, and market information about the number 

of platform and product families for each manufacturer. Table 12.4.22 and Table 12.4.23

show DOE’s estimates of the capital conversion costs necessary for each product class at 

each EL for energy efficiency standards. The methodology DOE used to calculate the 

capital conversion costs is described below.

During the MIA interviews, DOE asked manufacturers to estimate the capital 

conversion costs required to expand the production of higher-efficiency products that 

may be required by standards. Many manufacturers provided conversion estimates and 

descriptions of the required tooling and plant changes that would be necessary to upgrade 

product lines to meet various potential efficiency levels. DOE based its capital 

conversion cost estimates on the information gathered in these interviews. The numbers 

were validated against estimations of production line tooling, conveyor change, and line 

equipment costs from the engineering analysis cost model. The numbers were also 

reconciled with market information about product platforms and product efficiencies.

DOE assumed the major capital conversion costs would occur when 

manufacturers would have to redesign their existing product lines. For split-system air 

conditioning and split-system heat pump, manufacturers indicated that major redesigns of 

product families would be necessary between 14 and 16 SEER, depending on the product 

family, and at 21 SEER. For furnaces, manufacturers indicated the possibility of redesign 

at 90 percent AFUE, due to the addition of a secondary heat exchanger, and at 98 percent
12-30

AFUE. At efficiencies where no products are redesigned, incremental production changes 

may be necessary to comply with energy conservation standards and meet market 

requirements.

For regional standards, conversion costs were based on the standard in each 

region. DOE used shipment weighted conversion costs to determine the investment 

required by industry based on the assumption that a higher regional standard would not 

require the same level of incremental capital as a higher national standard. For example, a 

nationwide 90% AFUE standard for non-weatherized gas furnaces requires much greater 

capital conversion expenditures than a 90% AFUE in only the North. 

For the standby and off mode analysis, manufacturers indicated in interviews that 

capital conversion costs would be negligible compared to the capital conversion costs for 

the SEER, HSPF, and AFUE standards. Based on these comments, DOE did not 

incorporate capital conversion costs into its calculation of the economic impacts of 

standby and off mode on manufacturers in the GRIM model.

Table 12.4.22 Capital Conversion Costs by Product Class and Efficiency Level 

(2009$ Millions)

Equipment 

Class

Split System 

AC - Coil 

Only

Split System 

AC - Blower 

Coil

Split System 

HP - Blower 

Coil

Single 

Package 

AC

Single 

Package 

HP

NonWeatherized 

Gas Furnace

Mobile 

Home 

Furnace

Oil 

Furnace

Baseline 0 0 0 0 0 0 0 0

EL1 0 0 0 0 0 116 23 1

EL2 0 0 0 0 0 121 26 2

EL3 8 1 4 3 1 131 31 3

EL4 23 3 10 10 5 228 4

EL5 87 10 39 17 9

EL6 145 16 64 17 9

EL7 146 16 65 19 10

EL8 160 18 71

EL9 19 77

EL10 21 83

EL11 23 90

EL12 26 103

EL13 26 103

EL14 26

EL15 26

Table 12.4.23 Capital Conversion Costs by Product Class and Trial Standard Level 

(2009$ Millions)

Equipment 

Class

Split System 

AC - Coil 

Only

Split System 

AC - Blower 

Coil

Split System 

HP - Blower 

Coil

Single 

Package 

AC

Single 

Package 

HP

NonWeatherized 

Gas Furnace

Mobile 

Home 

Furnace

Oil 

Furnace
12-31

Baseline 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

TSL1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

TSL2 0.0 0.0 0.0 0.0 0.0 15.2 0.0 0.0

TSL3 4.3 0.5 3.7 2.7 1.4 3.0 9.9 1.0

TSL4 4.4 0.5 3.7 2.7 1.4 3.0 9.9 1.0

TSL5 4.3 0.5 3.7 2.7 1.4 39.6 13.7 3.0

TSL6 48.4 5.4 38.5 17.1 8.6 39.6 13.7 3.0

TSL7 159.7 25.8 90.0 18.9 9.5 228.0 31.1 4.0

12.4.9.2 Product Conversion Costs 

To calculate industry cash flow impacts, DOE evaluated the level of product

conversion costs manufacturers would incur to comply with amended energy 

conservation standards. DOE relied substantially on information obtained from 

manufacturer interviews and on market information about the number of platform and 

product families for each manufacturer. 

DOE assumed the major product conversion costs would occur when 

manufacturers would have to completely redesign their existing product line platforms. 

For split-system air conditioners and split-system heat pumps, manufacturers indicated 

that redesigns of product families would be necessary between 14 and 16 SEER and at 21 

SEER. For furnaces, manufacturers indicated the possibility of redesign at 90 percent 

AFUE, due to the addition of a secondary heat exchanger, and at 98 percent AFUE. At 

efficiencies where products are not completely redesigned, DOE incorporated a lower 

level of engineering costs associated with less significant design changes that would be 

necessary to comply with energy conservation standards.

As opposed to its approach with capital conversion costs, DOE did not scale 

product conversion costs based on shipments for regional standards. DOE expects that 

redesigning product lines to meet a higher regional standard would require similar effort

as redesigning a product to meet a higher national standard. DOE expects both to incur 

similar R&D, testing, and compliance costs. As a result, the product conversion costs 

used in the GRIM do not vary between regional and national standards of the same 

efficiency.

For standby mode and off mode, DOE estimated product conversion costs based 

on product testing cost quotations and on market information about the number of 

platform and product families for each manufacturer. DOE estimated total product 

conversion costs for the industry at $2.77 million.

Table 12.4.24 Product Conversion Costs by Product Class and Efficiency Level 

(2009$ Millions)

Equipment 

Class

Split System 

AC - Coil 

Only

Split System 

AC - Blower 

Coil

Split System 

HP - Blower 

Coil

Single 

Package 

AC

Single 

Package 

HP

NonWeatherized 

Gas Furnace

Mobile 

Home 

Furnace

Oil 

Furnac
12-32

Baseline 0 0 0 0 0 0 0 0

EL1 0 0 0 0 0 39 8 1

EL2 0 0 0 0 0 40 9 3

EL3 6 1 2 2 1 44 10 3

EL4 15 2 7 7 3 76 6

EL5 58 6 26 11 6

EL6 96 11 43 12 6

EL7 97 11 43 13 6

EL8 106 12 47

EL9 13 52

EL10 14 56

EL11 15 60

EL12 17 68

EL13 17 68

EL14 17

EL15 17

Table 12.4.25 Product Conversion Costs by Product Class and Trial Standard Level 

(2009$ Millions)

Equipment 

Class

Split System 

AC - Coil 

Only

Split System 

AC - Blower 

Coil

Split System 

HP - Blower 

Coil

Single 

Package 

AC

Single 

Package 

HP

NonWeatherized 

Gas Furnace

Mobile 

Home 

Furnace

Oil 

Furnac

Baseline 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

TSL1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

TSL2 0.0 0.0 0.0 0.0 0.0 5.1 0.0 0.0

TSL3 5.6 0.6 2.5 1.8 0.9 1.0 3.3 1.0

TSL4 5.6 0.6 2.5 1.8 0.9 1.0 3.3 1.0

TSL5 5.6 0.6 2.5 1.8 0.9 13.2 4.6 3.0

TSL6 63.6 7.1 25.7 11.4 5.8 13.2 4.6 3.0

TSL7 106.5 17.2 60.0 12.6 6.4 76.0 10.4 6.0

12.4.10 Markup Scenarios

DOE used several standards case markup scenarios to represent the uncertainty 

about the impacts of amended energy conservation standards on prices and profitability. 

In the base case, DOE used an average markup of 1.3. In the standards case for the active 

mode analysis, DOE modeled two markup scenarios to represent the uncertainty about 

the potential impacts on prices and profitability following the implementation of 

amended energy conservation standards: (1) a preservation of earnings before interest and 

tax (EBIT) scenario, and (2) a tiered markup scenario. These scenarios lead to different 

markups values, which, when applied to the inputted MPCs, result in varying revenue and 

cash flow impacts.
12-33

For regional standards, DOE assumed that products of the same efficiency 

maintain the same markup regardless of region. Because manufacturers are not able to 

determine the final installation site of a product, manufacturers would not likely be able 

to selectively price products based on regional standards. For example, in the case of the 

consensus agreement, a 14 SEER air conditioning unit sold in the South would have the 

same markup as an identical 14 SEER split-system air conditioning sold in the North 

even though the South has a higher minimum standard. 

DOE modeled two different markup scenarios to represent the potential impacts 

on prices and profitability of standby mode and off mode standards: (1) a preservation of 

gross margin percentage scenario and (2) a preservation of earnings before interest and 

tax (EBIT) scenario. DOE did not model the tiered scenario because it is unlikely that 

standby mode and off mode changes will affect product pricing tiers or cause 

commoditization of premium products.

12.4.10.1 Preservation of Operating Profit Scenario

During interviews, multiple manufacturers stated that the higher production costs 

could harm profitability. Because of the highly competitive market, several 

manufacturers suggested that the additional costs of higher minimum efficiency products 

could not be fully passed through to customers. Incorporating this feedback, DOE 

modeled the preservation of earnings before interest and taxes (EBIT) scenario.

As the cost of production goes up for minimum efficiency products in the 

standards case, the preservation of EBIT scenario models manufacturers reducing their 

markups to a level that maintains base case operating profit. DOE assumes that low 

efficiency products in the base case that roll-up to the higher minimum efficiency in the 

standards case will produce the same operating profit in both the base case and standards 

case. In other words, the industry can only maintain its operating profit in absolute dollars 

and cannot maintain a steady markup percentage as production costs increase for 

products affected by the roll-up.

DOE implemented this scenario by calibrating a markup that yielded the same per 

unit EBIT in the standards case as in the base case for each product class. DOE only 

calibrated a lower markup for the minimum efficiency level in the standards case since 

products that exceed the standard would not be impacted by the standards. EBIT for the 

base case was calculated by applying a flat markup to the MPC determined in the 

engineering analysis to get a sales price, and then subtracting the per unit SG&A and the 

per unit R&D expenses from the sales price. For the standards case, DOE used the MPC 

for a more efficient product and then calibrated the markup such that:

(MPCstandards x Markupstandards) – SG&Astandards – R&Dstandards = EBITbase 
12-34

Table 12.4.26 Preservation of EBIT Markups for Split-System Air Conditioners 

(Coil Only)

Trial 

Standard 

Level Baseline TSL 1, TSL 2 TSL 3, TSL 4, TSL 5 TSL 6 TSL 7

Baseline 1.30 1.30 1.29 1.28 1.26

EL1 1.30 1.30 1.29 1.28 1.26

EL2 1.30 1.30 1.29 1.28 1.26

EL3 1.30 1.30 1.30 1.28 1.26

EL4 1.30 1.30 1.30 1.28 1.26

EL5 1.30 1.30 1.30 1.30 1.26

EL6 1.30 1.30 1.30 1.30 1.26

EL7 1.30 1.30 1.30 1.30 1.26

EL8 1.30 1.30 1.30 1.30 1.26

Table 12.4.27 Preservation of EBIT Markups for Split-System Air Conditioners 

(Blower Coil)

Trial 

Standard 

Level Baseline TSL 1, TSL 2 TSL 3, TSL 4, TSL 5 TSL 6 TSL 7

Baseline 1.30 1.30 1.29 1.28 1.25

EL1 1.30 1.30 1.29 1.28 1.25

EL2 1.30 1.30 1.29 1.28 1.25

EL3 1.30 1.30 1.30 1.28 1.25

EL4 1.30 1.30 1.30 1.28 1.25

EL5 1.30 1.30 1.30 1.30 1.25

EL6 1.30 1.30 1.30 1.30 1.25

EL7 1.30 1.30 1.30 1.30 1.25

EL8 1.30 1.30 1.30 1.30 1.25

EL9 1.30 1.30 1.30 1.30 1.25

EL10 1.30 1.30 1.30 1.30 1.25

EL11 1.30 1.30 1.30 1.30 1.25

EL12 1.30 1.30 1.30 1.30 1.25

EL13 1.30 1.30 1.30 1.30 1.25

EL14 1.30 1.30 1.30 1.30 1.30

EL15 1.30 1.30 1.30 1.30 1.30

Table 12.4.28 Preservation of EBIT Markups for Split-System Heat Pumps

Trial 

Standard 

Level Baseline TSL 1, TSL 2 TSL 3, TSL 4, TSL 5 TSL 6 TSL 7

Baseline 1.30 1.30 1.29 1.28 1.25

EL1 1.30 1.30 1.29 1.28 1.25
12-35

EL2 1.30 1.30 1.29 1.28 1.25

EL3 1.30 1.30 1.30 1.28 1.25

EL4 1.30 1.30 1.30 1.28 1.25

EL5 1.30 1.30 1.30 1.30 1.25

EL6 1.30 1.30 1.30 1.30 1.25

EL7 1.30 1.30 1.30 1.30 1.25

EL8 1.30 1.30 1.30 1.30 1.25

EL9 1.30 1.30 1.30 1.30 1.25

EL10 1.30 1.30 1.30 1.30 1.25

EL11 1.30 1.30 1.30 1.30 1.25

EL12 1.30 1.30 1.30 1.30 1.25

EL13 1.30 1.30 1.30 1.30 1.30

Table 12.4.29 Preservation of EBIT Markups for Single Package Air Conditioners

Trial 

Standard 

Level Baseline TSL 1, TSL 2 TSL 3, TSL 4, TSL 5 TSL 6 TSL 7

Baseline 1.28 1.28 1.27 1.26 1.25

EL1 1.28 1.28 1.27 1.26 1.25

EL2 1.28 1.28 1.27 1.26 1.25

EL3 1.28 1.28 1.30 1.26 1.25

EL4 1.28 1.28 1.30 1.26 1.25

EL5 1.28 1.28 1.30 1.30 1.25

EL6 1.28 1.28 1.30 1.30 1.25

EL7 1.28 1.28 1.30 1.30 1.25

Table 12.4.30 Preservation of EBIT Markups for Single Package Heat Pumps

Trial 

Standard 

Level Baseline TSL 1, TSL 2 TSL 3, TSL 4, TSL 5 TSL 6 TSL 7

Baseline 1.28 1.28 1.27 1.26 1.25

EL1 1.28 1.28 1.27 1.26 1.25

EL2 1.28 1.28 1.27 1.26 1.25

EL3 1.28 1.28 1.30 1.26 1.25

EL4 1.28 1.28 1.30 1.26 1.25

EL5 1.28 1.28 1.30 1.30 1.25

EL6 1.28 1.28 1.30 1.30 1.25

EL7 1.28 1.28 1.30 1.30 1.25

Table 12.4.31 Preservation of EBIT Markups for Non-Weatherized Gas Furnaces

Trial 

Standard 

Level Baseline TSL 1 TSL 2 TSL 3, TSL 4 TSL 5, TSL 6 TSL 7
12-36

Baseline 1.35 1.35 1.29 1.30 1.28 1.26

EL1 1.35 1.35 1.29 1.30 1.28 1.26

EL2 1.35 1.35 1.29 1.30 1.28 1.26

EL3 1.35 1.35 1.30 1.30 1.28 1.26

EL4 1.35 1.35 1.30 1.30 1.30 1.26

Table 12.4.32 Preservation of EBIT Markups for Mobile Home Furnaces

Trial 

Standard 

Level Baseline TSL 1, TSL 2 TSL 3, TSL 4 TSL 5, TSL 6, TSL 7

Baseline 1.30 1.30 1.27 1.27

EL1 1.30 1.30 1.27 1.27

EL2 1.30 1.30 1.30 1.27

EL3 1.30 1.30 1.30 1.27

Table 12.4.33 Preservation of EBIT Markups for Oil Furnaces

Trial 

Standard 

Level Baseline TSL 1, TSL 2 TSL 3, TSL 4 TSL 5, TSL 6 TSL 7

Baseline 1.35 1.35 1.35 1.35 1.31

EL1 1.35 1.35 1.35 1.35 1.31

EL2 1.35 1.35 1.30 1.35 1.31

EL3 1.35 1.35 1.30 1.35 1.31

EL4 1.35 1.35 1.30 1.30 1.31

12.4.10.1 Tiered Markup Scenario

During interviews, multiple manufacturers noted concerns about the 

commoditization of products due to amended standards. As the energy conservation 

standards increase, the range of efficiencies between the minimum efficiency and the 

max tech efficiency decreases. One outcome of this change, according to manufacturers, 

would be less differentiation between premium products and entry-level products based 

on efficiency. Though comfort features, such as air flow and humidity control, often 

impact premium pricing, efficiency is still an important factor in setting pricing tiers.

In the tiered markup scenario, DOE models the situation in which manufacturers 

set markups based on three tiers of products. The tiers described by manufacturers in 

MIA interviews were defined as “good, better, best”, or “value, standard, premium.” The 

high-volume “value” product lines typically have fewer features, lower efficiency, and 

lower markups while premium product lines have more features, higher efficiency, and 

higher markups. In the standards case, the tiered markups scenario considers the situation 

in which the breadth of a manufacturer’s portfolio of products shrinks and amended 

standards “demote” higher-tier products to lower tiers. As a result, higher efficiency 

products that previously commanded standard and premium mark-ups are assigned value 

and standard markups, respectively. As the standards case minimum efficiency increased, 
12-37

DOE incorporated the change from a three tier to a two tier markup. This represents the 

situation where the efficiency standard begins to limited manufacturer design options for 

differentiating premium and value products.

Table 12.4.34 Tiered Markups for Split-System Air Conditioners (Coil Only)

Trial 

Standard 

Level Baseline TSL 1, TSL 2 TSL 3, TSL 4, TSL 5 TSL 6 TSL 7

Baseline 1.22 1.22 1.22 1.22 1.22

EL1 1.22 1.22 1.22 1.22 1.22

EL2 1.32 1.32 1.22 1.22 1.22

EL3 1.32 1.32 1.32 1.22 1.22

EL4 1.32 1.32 1.32 1.22 1.22

EL5 1.32 1.32 1.32 1.32 1.22

EL6 1.32 1.32 1.32 1.32 1.22

EL7 1.32 1.32 1.32 1.32 1.22

EL8 1.43 1.43 1.32 1.32 1.22

Table 12.4.35 Tiered Markups for Split-System Air Conditioners (Blower Coil)

Trial 

Standard 

Level Baseline TSL 1, TSL 2 TSL 3, TSL 4, TSL 5 TSL 6 TSL 7

Baseline 1.19 1.19 1.19 1.19 1.19

EL1 1.19 1.19 1.19 1.19 1.19

EL2 1.26 1.26 1.19 1.19 1.19

EL3 1.26 1.26 1.26 1.19 1.19

EL4 1.26 1.26 1.26 1.19 1.19

EL5 1.26 1.26 1.26 1.26 1.19

EL6 1.26 1.26 1.26 1.26 1.19

EL7 1.26 1.26 1.26 1.26 1.19

EL8 1.37 1.37 1.26 1.26 1.19

EL9 1.37 1.37 1.37 1.26 1.19

EL10 1.37 1.37 1.37 1.37 1.19

EL11 1.37 1.37 1.37 1.37 1.19

EL12 1.37 1.37 1.37 1.37 1.19

EL13 1.37 1.37 1.37 1.37 1.19

EL14 1.37 1.37 1.37 1.37 1.26

EL15 1.37 1.37 1.37 1.37 1.26
12-38

Table 12.4.36 Tiered Markups for Split-System Heat Pumps

Trial 

Standard 

Level Baseline TSL 1, TSL 2 TSL 3, TSL 4, TSL 5 TSL 6 TSL 7

Baseline 1.20 1.20 1.20 1.20 1.20

EL1 1.30 1.20 1.20 1.20 1.20

EL2 1.30 1.30 1.20 1.20 1.20

EL3 1.30 1.30 1.30 1.20 1.20

EL4 1.30 1.30 1.30 1.20 1.20

EL5 1.30 1.30 1.30 1.30 1.20

EL6 1.30 1.30 1.30 1.30 1.20

EL7 1.30 1.30 1.30 1.30 1.20

EL8 1.41 1.41 1.30 1.30 1.20

EL9 1.41 1.41 1.41 1.30 1.20

EL10 1.41 1.41 1.41 1.41 1.20

EL11 1.41 1.41 1.41 1.41 1.20

EL12 1.41 1.41 1.41 1.41 1.20

EL13 1.41 1.41 1.41 1.41 1.30

Table 12.4.37 Tiered Markups for Single Package Air Conditioners

Trial 

Standard 

Level Baseline TSL 1, TSL 2 TSL 3, TSL 4, TSL 5 TSL 6 TSL 7

Baseline 1.17 1.17 1.17 1.17 1.17

EL1 1.17 1.17 1.17 1.17 1.17

EL2 1.27 1.27 1.17 1.17 1.17

EL3 1.27 1.27 1.17 1.17 1.17

EL4 1.37 1.37 1.27 1.17 1.17

EL5 1.37 1.37 1.27 1.17 1.17

EL6 1.37 1.37 1.37 1.27 1.17

EL7 1.37 1.37 1.37 1.27 1.17
12-39

Table 12.4.38 Tiered Markups for Single Package Heat Pumps

Trial 

Standard 

Level Baseline TSL 1, TSL 2 TSL 3, TSL 4, TSL 5 TSL 6 TSL 7

Baseline 1.19 1.19 1.19 1.19 1.19

EL1 1.19 1.19 1.19 1.19 1.19

EL2 1.19 1.19 1.19 1.19 1.19

EL3 1.29 1.29 1.19 1.19 1.19

EL4 1.29 1.29 1.19 1.19 1.19

EL5 1.39 1.39 1.29 1.19 1.19

EL6 1.39 1.39 1.29 1.19 1.19

EL7 1.39 1.39 1.39 1.29 1.19

EL8 1.39 1.39 1.39 1.29 1.19

EL9 1.39 1.39 1.39 1.39 1.19

Table 12.4.39 Tiered Markups for Non-Weatherized Gas Furnaces

Trial 

Standard 

Level Baseline TSL 1 TSL 2 TSL 3, TSL 4 TSL 5, TSL 6 TSL 7

Baseline 1.23 1.23 1.23 1.23 1.23 1.23

EL1 1.39 1.39 1.23 1.23 1.23 1.23

EL2 1.39 1.39 1.23 1.23 1.23 1.23

EL3 1.39 1.39 1.39 1.39 1.23 1.23

EL4 1.49 1.49 1.39 1.49 1.39 1.23

Table 12.4.40 Tiered Markups for Mobile Home Furnaces

Trial 

Standard 

Level Baseline TSL 1, TSL 2 TSL 3, TSL 4 TSL 5, TSL 6, TSL 7

Baseline 1.28 1.28 1.28 1.28

EL1 1.39 1.39 1.28 1.28

EL2 1.39 1.39 1.39 1.28

EL3 1.39 1.39 1.39 1.28

EL4 1.50 1.50 1.39 1.39

EL5 1.39 1.39 1.39 1.39

EL6 1.39 1.39 1.39 1.39

EL7 1.39 1.39 1.39 1.39

EL8 1.39 1.39 1.39 1.39

EL9 1.39 1.39 1.39 1.39
12-40

Table 12.4.41 Tiered Markups for Oil Furnaces

Trial 

Standard 

Level Baseline TSL 1, TSL 2 TSL 3, TSL 4 TSL 5, TSL 6 TSL 7

Baseline 1.25 1.25 1.25 1.25 1.25

EL1 1.34 1.34 1.25 1.25 1.25

EL2 1.34 1.34 1.34 1.25 1.25

EL3 1.45 1.45 1.34 1.25 1.25

EL4 1.45 1.45 1.45 1.34 1.25

EL5 1.45 1.45 1.45 1.34 1.34

EL6 1.45 1.45 1.45 1.34 1.34

EL7 1.45 1.45 1.45 1.34 1.34

EL8 1.45 1.45 1.45 1.34 1.34

EL9 1.45 1.45 1.45 1.34 1.34

12.4.10.1 Preservation of Gross Margin Percentage Scenario

For the analysis of standby mode and off mode standard, DOE included the 

“preservation of gross margin percentage” scenario to help establish a range of potential 

impacts on manufacturer profitability. The scenario assumes that manufacturers will not 

alter markups as production costs increase due to the standby mode and off mode 

standards. The GRIM applied the baseline markup across all proposed standard levels. As 

production costs increase with efficiency, this scenario implies that the absolute dollar 

markup will increase as well. Manufacturers believe it is optimistic to assume they would 

be able to maintain the same increase in gross margin percentage markup production 

costs in response to the standby mode and off mode standard. Therefore, DOE assumes 

that this scenario represents a high bound to industry profitability under an energy 

conservation standard.

12.4.11 Experience Curve Rates

For this rulemaking, DOE applied experience curve multipliers to both the base 

case and standards case MSP forecasts in the GRIM. The multipliers reflect a long-term 

price decline over the analysis period that is consistent with the historical price trend for 

unitary air conditioners and warm air furnace equipment. The experience curve applied to 

the GRIM is identical to the experience curve applied to the NIA for this rule. Refer to 

section IV.F.1 for a description of how DOE derived the experience curve multipliers. A 

detailed discussion of the experience curve modeling is provided in Appendix 8-J of the 

TSD.

12.5 INDUSTRY FINANCIAL IMPACTS

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

estimated indicators of financial impacts on the residential HVAC industry. The 

following sections detail additional inputs and assumptions for the analysis of active 
12-41

mode standards for conventional products (split-system air conditioning, split-system 

heat pump, single package air conditioning, single package heat pump, and nonweatherized gas furnace) and niche products (mobile home furnace and oil furnace). It 

also details the additional inputs and assumption for the analysis of standby mode and off 

mode for the product classes being considered. 

The main results of the MIA are also reported in this section. The MIA consists of 

two key financial metrics: INPV and annual cash flows.

12.5.1 Introduction

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

economic impacts of different TSLs in the standards case. The INPV is different from 

DOE’s NPV, which is applied to the U.S. economy. The INPV is the sum of all net cash 

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

rulemaking estimates cash flows from 2010 to 2045, the same analysis period used in the 

NIA (chapter 11).

In the MIA, DOE compares the INPV of the base case (no amended energy 

conservation standards) to that of each TSL in the standards case. The difference between 

the base case and a standards case INPV is an estimate of the economic impacts that 

implementing that particular TSL would have on the industry. For both conventional and 

niche products, DOE examined the two markup scenarios: the preservation of EBIT and 

the tiered markup scenario. The markup scenarios are described in greater detail in 

section 12.4.9 above.

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

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

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

strain the industry’s access to capital. Consequently, the sharp drop in financial 

performance could cause investors to flee, even though recovery may be possible. Thus, a 

short-term disturbance can have long-term effects that the INPV cannot capture. To get 

an idea of the behavior of annual net cash flows, Figure 12.5.1 through Figure 12.5.4

below present the annual net or free cash flows from 2010 through 2023. 

Because the same markup scenarios are used for the two product categories 

described above, each of the figures below has a similar shape. Annual cash flows are 

discounted to the base year, 2010. After the standards announcement date (i.e., the 

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

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

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

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

stringent the amended energy conservation standard, the greater the impact on industry 

cash flows in the years leading up to the compliance date, as product conversion costs 

lower cash inflows from operations and capital conversion costs increase cash outflows 

for capital expenditures. 
12-42

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

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

amended energy conservation standards could create stranded assets, i.e.

12.5.2 Conventional Products Industry Financial Impacts

tooling and 

equipment that would have enjoyed longer use if the energy conservation standard had 

not made them obsolete. In this year, manufacturers write down the remaining book value 

of existing tooling and equipment whose value is affected by the amended energy 

conservation standard. This one time write down acts as a tax shield that alleviates 

decreases in cash flow from operations in the year of the write-down. In this year, there is 

also an increase in working capital that reduces cash flow from operations. A large 

increase in working capital is needed due to more costly production components and 

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

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

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

Table 12.5.1 and Table 12.5.2 provide the INPV estimates for conventional 

products. Figure 12.5.1 and Figure 12.5.2 present the annual net cash flows for 

conventional products for each of the different markup scenarios.

Table 12.5.1 Changes in Industry Net Present Value for Conventional Products 

(Preservation of EBIT Markup Scenario)*

Units Base 

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV (2009$ 

millions) 8,347 8,354 7,847 7,936 7,893 7,857 7,685 6,855

Change in 

INPV

(2009$ 

millions) n/a 8 (500) (411) (454) (490) (662) (1,492)

(%) n/a 0.1 (6.0) (4.9) (5.4) (5.9) (7.9) (17.9)

*Values in parenthesis indicate negative numbers

Table 12.5.2 Changes in Industry Net Present Value for Conventional Products 

(Tiered Markup Scenario) *

Units Base 

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV (2009$ 

millions) 8,347 8,379 8,021 7,638 7,475 7,467 6,509 4,578

Change in 

INPV

(2009$ 

millions) n/a 33 (326) (709) (871) (879) (1,837) (3,768)

(%) n/a 0.4 (3.9) (8.5) (10.4) (10.5) (22.0) (45.1)

*Values in parenthesis indicate negative numbers
12-43

Figure 12.5.1 Annual Industry Net Cash Flows for Conventional Products 

(Preservation of EBIT Markup Scenario)

Figure 12.5.2 Annual Industry Net Cash Flows for Conventional Products (Tiered 

Markup Scenario)
12-44

12.5.3 Niche Products Industry Financial Impacts 

Table 12.5.3 and Table 12.4.5 provide the INPV estimates for the niche products. 

Figure 12.5.3 and Figure 12.5.4 present the annual net cash flows for niche products for 

each markup scenario.

Table 12.5.3 Changes in Industry Net Present Value for Niche Products 

(Preservation of EBIT Markup Scenario) *

Units Base 

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV (2009$ 

millions) 149 149 151 132 125 131 131 109

Change in 

INPV

(2009$ 

millions) n/a 0 2 (17) (24) (18) (18) (40)

(%) n/a 0.0 % 1.2 % (11.6)% (16.4)% (12.1)% (12.1)% (26.7)%

*Values in parenthesis indicate negative numbers

Table 12.5.4 Changes in Industry Net Present Value for Niche Products

(Tiered Markup Scenario) *

Units Base 

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV (2009$ 

millions) 149 149 151 129 120 114 114 94

Change in 

INPV

(2009$ 

millions) n/a (0) 2 (20) (29) (36) (36) (55)

(%) n/a (0.0)% 1.4 % (13.5)% (19.6)% (23.8)% (23.8)% (36.7)%

*Values in parenthesis indicate negative numbers
12-45

Figure 12.5.3 Annual Industry Net Cash Flows for Niche Products 

(Preservation of EBIT Markup Scenario)
12-46

Figure 12.5.4 Annual Industry Net Cash Flows for Niche Products 

(Tiered Markup Scenario)

12.6 IMPACTS ON SMALL BUSINESS MANUFACTURERS

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

business manufacturers of products covered by this rulemaking. For the manufacturers of 

central air conditioners, heat pumps, and residential furnaces, the Small Business 

Administration (SBA) has set a size threshold of 750 employees or less for an entity to be 

considered as a small business for this category. During its market survey, DOE used all 

available public information to identify potential small manufacturers. DOE’s research 

involved industry trade association membership directories (including AHRI), product 

databases (e.g., AHRI Directory, the SBA Database), individual company websites, and 

market research tools (e.g., Dunn and Bradstreet reports) to create a comprehensive list of 

companies that manufacture or sell products covered by this rulemaking. DOE also asked 

stakeholders and industry representatives if they were aware of any other small 

manufacturers during manufacturer interviews and at previous DOE public meetings. 

DOE reviewed publicly-available data and contacted select companies on its list, as 

necessary, to determine whether they met the SBA’s definition of a small business 

manufacturer of covered central air conditioners, heat pumps, and residential furnaces. 

DOE screened out companies that did not offer products covered by this rulemaking, did 

not meet the definition of a “small business,” or are foreign owned and operated.

For central air conditioners, DOE initially identified 89 distinct brands sold in the 

U.S. Out of these 89 brands, DOE determined that 18 brands are managed by small 

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

30.00

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

2008$ Millions

Year

Net Cash Flow Totals for Niche Products

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Markup Scenario: Tiered Markups
12-47

businesses. While identifying the parent companies of the 18 brands, DOE determined 

that only four companies are domestic small business manufacturers of central air 

conditioning products. Three of these small businesses produce space-constrained 

products and one produces small-duct, high-velocity products. None of the small 

businesses produced split system air conditioning, split system heat pumps, single 

package air conditioning, or single package heat pump products, which make up 99 

percent of industry air conditioner and heat pump shipments.

For residential furnaces, DOE initially identified at least 90 distinct brands sold in 

the U.S. Out of these 90 brands, DOE determined that 14 were managed by small 

businesses. DOE determined that only five companies are domestic small business 

manufacturers of furnace products. All five small businesses manufacture oil furnaces as 

their primary product line. One of the small businesses also produces mobile home 

furnaces as a secondary product offering. DOE did not identify any small manufacturers 

producing non-weatherized gas furnaces or weatherized gas furnaces, which together 

make up over 95 percent of residential furnace shipments.

Next, DOE contacted all of the identified small business manufacturers listed in 

the AHRI directory to request an interview about the possible impacts of amended energy 

conservation standards on small manufacturers. Not all manufacturers responded to 

interview requests; however, DOE did interview three small furnace manufacturers and 

two small central air conditioning and heat pump manufacturers. From these discussions, 

DOE determined the expected impacts of the rule on affected small entities. 

12.6.1 Impacts on Small Central Air Conditioning and Heat Pump Manufacturers

As discussed above, no small manufacturers for split system air conditioning, split 

system heat pump, single package air conditioning, or single package heat pump products 

were identified. DOE identified four domestic small business manufacturers of central air 

conditioner and heat pump products. All four small businesses manufacture niche 

products: three produce space constrained products and one produces SDHV products.

With regard to the space-constrained market, the three small business 

manufacturers identified by DOE make up the vast majority of shipments of these 

products in the United States. DOE did not identify any competing large manufacturers in 

this niche market. Supporting this finding, no large manufacturers listed through-thewall, or space-constrained, products in the AHRI directory. According to manufacturer 

interviews, no manufacturers have entered or exited the space-constrained market in the 

past decade. Furthermore, based on the screening analysis, teardown analysis, and market 

research, DOE has determined that the current energy conservation standard applicable to 

these products is equal to the max-tech efficiency level. In other words, DOE has 

determined it is unable to raise the energy conservation standards applicable to spaceconstrained products due to the state of technology and the design constraints inherent to 

these products. Therefore, because the efficiency level to which these three small 

manufacturers are subject will not change, DOE does not anticipate that the adopted rule 
12-48

would adversely affect the small businesses manufacturing space-constrained air 

conditioning products.

With respect to SDHV products, DOE identified one company as a small 

domestic manufacturer. The company’s primary competitors are a small manufacturer 

based in Canada and a domestic manufacturer that does not qualify as a small business 

due to its parent company’s size. These three manufacturers account for the vast majority 

of the SDHV market in the U.S., which makes up less than 1 percent of the overall 

domestic central air conditioning and heat pumps market. 

The current energy conservation standard for SDHV is 13 SEER. In today’s 

notice, DOE is not proposing to amend that level. Therefore, because the efficiency level 

to which the manufacturers are subject will not change, DOE does not anticipate that the 

adopted rule would adversely affect the manufacturers of SDHV products. The ruling 

would not change the competitive environment for the single small manufacturer.

12.6.2 Impacts on Small Residential Furnace Manufacturers

DOE identified five domestic small business manufacturers of residential furnace 

products. All five produce oil furnaces as their primary product line. Oil furnaces make 

up less than 3 percent of residential furnace shipments. One of the small businesses also 

produces mobile home furnaces as a secondary product line. No additional small 

manufacturers of mobile home furnaces were identified. 

The five small business manufacturers of residential furnace products account for 

22 percent of the 1,207 active oil furnace product listings in the AHRI Directory (based 

on information available from the AHRI Directory in September 2010). Ninety-nine 

percent of the small oil manufacturer product listings were above the base standard of 78 

percent AFUE. Seventy-seven percent of the small oil furnace manufacturer product 

listings had efficiencies equal to or above 83 percent AFUE, the efficiency level for oil 

furnaces adopted in today’s notice. All small business manufacturers of residential 

furnace products have product lines that meet the efficiency level adopted in today’s 

notice.

In interviews, several small manufacturers noted that the majority of their 

businesses’ sales are above 83-percent AFUE today. According to interviews, the small 

manufacturers focus on marketing their brands as premium products in the replacement 

market, while the major manufacturers tend to sell their products at lower cost and lower 

efficiency. For this reason, a move to a higher standard is unlikely to require investments 

in research and development by small manufacturers to catch up to larger manufacturers 

in terms of technology development. However, in interviews, small oil furnace 

manufacturers did indicate some concern if the energy conservation standard were to be 

raised to 85 percent, which is the efficiency level just below max-tech, or above. At these 

efficiency levels, according to manufacturers, the installation costs for oil furnaces could 

significantly increase due to the need for chimney liners, which are necessary to manage 

the acidic condensate that results from the high sulfur content of domestic heating oil. 
12-49

Small oil furnace manufacturers expressed concern that the additional installation costs of 

a chimney liner would deter home owners from purchasing new oil furnaces and 

accelerate the contraction of an already-shrinking oil furnace market. Additionally, small 

manufacturers were concerned that a high standard would leave little opportunity to 

differentiate their oil furnaces as premium products through higher efficiencies. If the 

amended standards were sufficiently stringent as to leave little room for small 

manufacturers to offer higher-efficiency products, it would become more difficult for 

them to justify their premium positioning in the marketplace. However, manufacturers 

indicated that the change in the efficiency level adopted by today’s notice would not 

significantly alter that premium pricing dynamic.

For oil furnaces, the majority of both small business product lines and sales are at 

efficiencies equal to or above 83-percent AFUE. Oil furnace manufacturers do not expect 

to face significant conversion costs to reach the adopted level. Based on manufacturer 

feedback, DOE estimated that a typical small oil furnace manufacturer would need to 

invest $250,000 to cover conversion costs, including both capital and product conversion 

costs such as investments in production lines, R&D and engineering resources, and 

product testing, to meet the adopted standard. However, any relatively fixed costs 

associated with research and development, marketing, and testing necessitated by today’s 

adopted rule would have to be spread over lower volumes, on average, as compared to 

larger manufacturers. DOE believes this disproportionate adverse impact on small 

manufacturers is somewhat mitigated by an industry trend toward large manufacturers 

outsourcing their oil furnace production to small manufacturers. Interviewed small 

manufacturers indicated that larger manufacturers are becoming less willing to allocate 

resources to the shrinking oil furnace market, yet still want to maintain a presence in this 

portion of the market in order to offer a full product line. In turn, market share in oil 

furnace production is shifting to small manufacturers. For all of the foregoing reasons, 

DOE does not believe today’s adopted rule jeopardizes the viability of the small oil 

furnace manufacturers. 

As noted above, DOE identified one small manufacturer of mobile home 

furnaces. This manufacturer primarily produces and sells oil furnaces, but it also 

produces mobile home furnaces as a secondary product offering. The standard adopted in 

today’s notice would require 90-percent AFUE in the North and 80-percent AFUE in the 

South. DOE believes the adopted level would be unlikely to cause the small manufacturer 

to incur significant conversion costs because their current product offering already meets 

the adopted level, as illustrated by the listings in the AHRI directory. 

In summary, DOE recognizes that amended energy conservation standards can 

potentially disproportionately impact small businesses. Larger manufacturers could have 

a competitive advantage due to their size and ability to access capital that may not be 

available to small businesses. Additionally, in some market segments, larger businesses 

have larger production volumes over which to spread costs. However, DOE has found 

that these risks to be limited for the reasons noted above.

12.7 OTHER IMPACTS 
12-50

12.7.1 Employment

12.7.1.1 Methodology

To quantitatively assess the impacts of energy conservation standards on 

employment, DOE used the GRIM to estimate the domestic labor expenditures and 

number of employees in the base case and at each TSL from 2010 through 2045. DOE 

used statistical data from the U.S. Census Bureau’s 2008 Economic Census, the results of 

the engineering analysis, and interviews with manufacturers to determine the inputs 

necessary to calculate industry-wide labor expenditures and domestic employment levels. 

Labor expenditures related to manufacturing of the product are a function of the labor 

intensity of the product, the sales volume, and an assumption that wages remain fixed in 

real terms over time. In evaluating energy efficiency standard and standby and off mode

standard impacts on employment, DOE found that energy efficiency standards drove 

employment changes to a much greater degree than standby mode and off mode 

standards. The design options for standby mode and off mode amount to component 

swaps, which, while requiring some product development effort, would not meaningfully 

affect the product labor content. Therefore, the standby and off mode TSLs do not result 

in significant changes to employment. The change in employment is driven by energy 

efficiency TSLs.

The production worker estimates in this section only cover employment up to the 

line-supervisor level who are directly involved in fabricating and assembling a product 

within an Original Equipment Manufacturer (OEM) facility. Workers performing 

services that are closely associated with production operations, such as material handling 

with a forklift, are also included as production labor. DOE’s estimates only account for 

production workers who manufacture the specific products covered by this rulemaking. 

For example, even though a manufacturer may also produce hearth products, a worker on 

a hearth product line would not be included with the estimate of the number of residential 

furnace workers.

In the GRIM, DOE used the labor content of each product and the manufacturing 

production costs from the engineering analysis to estimate the annual labor expenditures 

in the industry. DOE used Census data and interviews with manufacturers to estimate the 

portion of the total labor expenditures that is attributable to U.S. (i.e.

The total labor expenditures in each year are calculated by multiplying the MPCs by the 

labor percentage of MPCs. From interviews, DOE estimated that 89 percent of covered 

residential furnace, air conditioner and heat pump products are manufactured and sold in 

the U.S. DOE multiplied the total annual labor expenditures in the GRIM by the 

percentage of U.S. production to calculate domestic labor expenditures for residential 

furnace, air conditioner and heat pump production labor. The domestic annual labor 

expenditures in the GRIMs were converted to domestic production employment levels by 

dividing production labor expenditures by the annual payment per production worker 

(production worker hours times the labor rate found in the U.S. Census Bureau’s 2008 

Economic Census). The number of non-production employees was calculated by 

multiplying the number of production workers by the ratio of non-production workers to 

production workers calculated using the employment data from the U.S. Census Bureau’s 

, domestic) labor.
12-51

2008 Economic Census. The total direct employment impacts calculated in the GRM are 

the sum of the production and non-production workers.

The domestic annual labor expenditures and employment levels were calculated 

for the base case and at each TSL. The impacts on domestic employment due to standards 

can be assessed by comparing the employment results in the base case to the results at 

each TSL. In the GRIM, the employment results represent direct U.S. production workers 

that are impacted by this rulemaking. U.S. workers involved in manufacturing or 

supporting products for exports would not be impacted and are not included as part of the 

labor impacts. 

12.7.1.2 Employment Impacts

The GRIM forecast the residential furnace and central air conditioning and heat 

pump domestic labor expenditure for production labor in 2016 will be approximately 

$605.55 million. Using the $17.38 wage rate and 1,963 production hours per year per 

employee found in the U.S. Census Bureau’s 2008 Economic Census, the GRIM 

estimates there would be approximately 17,746 U.S. production employees involved in 

the production of residential furnaces and central air conditioners and heat pumps 

covered in this rulemaking. In addition, DOE estimates that 6,452 non-production 

employees in the United States will support residential furnace and central air conditioner 

and heat pump production. 

Table 12.7.1 shows the range of the impacts of potential amended energy 

conservation standards on U.S. production workers in the residential furnace and central 

air conditioner and heat pump market. The table accounts for both conventional products 

and niche furnace products.

Table 12.7.1 Potential Changes in the Total Number of Residential Furnace and 

Central Air Conditioners and Heat Pumps Production Workers in 2016

Trial Standard 

Level

Total Number of Domestic Production Workers 

in 2016 (without changes in production locations)

Potential Changes in Domestic 

Production Workers in 2016*

Base Case 16,902 -

1 16,998 96 - (16,902)

2 17,242 340 - (16,902)

3 17,485 583 - (16,902)

4 17,746 844 - (16,902)

5 17,940 1038 - (16,902)

6 17,998 1096 - (16,902)

7 18,102 1200 - (16,902)

* Numbers in parentheses indicate negative numbers. 

The employment impacts shown in Table 12.7.1 represent the potential 

production employment that could result following the compliance date of amended 

energy conservation standards. The upper end of the results in the table estimates the

maximum change in the number of production workers after amended energy 
12-52

conservation standards must be met. The upper end of the results assumes manufacturers 

would continue to produce the same scope of covered products in the same production 

facilities or in new or expanded facilities still located in the United States. The upper end 

of the range also assumes that domestic production does not shift to lower-labor-cost 

countries. Because there is a real risk of manufacturers evaluating sourcing decisions in 

response to amended energy conservation standards, the lower end of the range of 

employment results includes the estimated total number of U.S. production workers in the 

industry who could lose their jobs if all existing production were moved outside of the 

U.S. Finally, the employment impacts shown are independent of the employment impacts 

from the broader U.S. economy, which are documented in chapter 14, Employment 

Impact Analysis, of the TSD.

Based on the GRIM analysis, DOE estimates that there would be positive 

employment impacts among residential furnace and central air conditioner and heat pump 

manufacturers at the upper bound. This effect occurs because the absolute amount of 

labor content increases per product at higher efficiency levels and the analysis assumes 

manufacturers do not alter the current mix of domestic and international production. DOE 

believes the assumption implied by this scenario becomes less realistic at the most 

stringent TSLs when complete technology changes would likely require new production 

facilities. 

12.7.2 Production Capacity

Most manufacturers currently have excess production capacity, reflected in part 

by the substantial decline in shipments since the height of the housing boom in 2005. 

Manufacturers did not express major capacity-related concerns at the efficiency levels 

included at TSL 1, 2, and 3. Additionally, manufacturers did not express concerns about 

the production capacity at TSL 4, which includes accelerated compliance dates arising 

out of the consensus agreement. All major manufacturers that were interviewed agreed 

that the timelines in TSL 4 could be met and that no capacity shortages were likely to 

occur.

12.7.2.1 Central Air Conditioner and Heat Pump Capacity Impacts

The selection of higher TSLs could create capacity constraints in the central air 

conditioner and heat pump industry. At the efficiency levels included in TSL 6 and TSL 

7, manufacturers were concerned that the changes in technology could impose capacity 

constraints in the near to medium term. 

At TSL 6, the higher energy conservation standard would increase industry 

demand for some key components and tooling over current levels. All major 

manufacturers would seek to increase their purchasing volumes of high efficiency 

compressors, ECM motors, and production tooling in the same timeframe. Given that the 

industry relies on a limited number of suppliers for these parts, some manufacturers 

expressed concern that a bottleneck in the supply chain could create production 

constraints. 
12-53

At TSL 7, the major domestic manufacturers of split-system air conditioners and 

heat pumps would likely need to redesign all of their existing products to incorporate 

more-efficient technologies for residential applications. If manufacturers chose not to or 

could not afford to develop new technologies, they would likely need to significantly 

enlarge the products’ heat exchangers, which in turn would require a redesign of their 

production lines to accommodate significantly larger units or to add a second compressor. 

This increased demand for components and production tooling could lead to short-term 

constraints on production.

12.7.2.2 Residential Furnace Capacity Impacts

For non-weatherized gas furnaces, which make up the majority of industry

furnace shipments, manufacturers would need to expand or redesign production lines for 

secondary heat exchangers at TSL 2 through TSL 6. One manufacturer indicated that a 

90-percent AFUE non-weatherized gas furnace could take as much as thirty percent more 

time to build than an 80-percent AFUE furnace. However, given current capacity in the 

industry and available resources, no manufacturer expressed concern about meeting the 

accelerated deadlines in the adopted standard as long as the consensus agreement is 

adopted quickly.

However, manufacturers did express concern about capacity at max-tech. At TSL 

7, non-weatherized gas furnace manufacturers would need to redesign all product lines to 

incorporate burner modulation technology, which includes adding modulating gas valves, 

variable speed inducer fans, and more sophisticated controls. The coinciding demand for 

modulating gas valves and variable speed inducer fans from seven major manufacturers 

could potentially create supply chain constraints. 

Similar max tech concerns were expressed by oil furnace manufacturers.

Manufacturers interviewed highlighted concerns about the technical feasibility of 

increasing oil furnace efficiency to condensing levels. Most manufacturers have not 

found a design that reliably delivers performance at or above 95 percent AFUE, the max 

tech level. Some manufacturers indicated that they would not be able to produce products 

at the condensing level until the sulfur content of heating oil was regulated and 

substantially lowered in key markets. The development of a cost-effective, reliable and 

durable 95 percent AFUE oil furnace would require conversion expenditures by a 

majority of the industry. It is unclear how many manufacturers would make the 

conversion investment to compete in a market that is below 80,000 units per year in size 

and, according to most manufacturers, is shrinking. Given the limited size of the oil 

furnace market and the market’s declining shipments, it could be expected that a number 

of manufacturers would choose to leave the market rather than compete at this efficiency 

level. This could result in a shortage of production capacity to meet market demand.

12.7.3 Cumulative Regulatory Burden 

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

the combined effects of several impending regulations may have serious consequences 
12-54

for some manufacturers, groups of manufacturers, or an entire industry. Assessing the 

impact of a single regulation may overlook this cumulative regulatory burden. For the 

cumulative regulatory burden analysis, DOE looks at other significant product-specific 

regulations that could affect furnace and central air conditioning and heat pump 

manufacturers that will take effect 3 years before or after the compliance date of amended 

energy conservation standards for these products.a

Companies that produce a wide range of regulated products may be faced with 

more capital and product development expenditures than competitors with a narrower 

scope of products. Regulatory burdens can prompt companies to exit the market or reduce 

their product offerings, potentially reducing competition. Smaller companies in particular 

can be affected by regulatory costs since these companies have lower sales volumes over 

which they can amortize the costs of meeting new regulations. A standard is not 

economically justified if it contributes to an unacceptable level of cumulative regulatory 

burden. 

In addition to the amended energy 

conservation regulations, several other Federal regulations apply to these products and 

other equipment produced by the same manufacturers. While the cumulative regulatory 

burden focuses on the impacts on manufacturers of other Federal requirements, DOE also 

has described a number of regulations from entities other than the Federal government 

that may impact manufacturers of products covered by this rulemaking. 

12.7.3.1 DOE Regulations for Other Products Produced by Affected 

Manufacturers

In addition to the amended energy conservation standards on residential HVAC

products, several other Federal regulations and pending regulations apply to other 

products produced by the same manufacturers. DOE recognizes that each regulation can 

significantly affect a manufacturer’s financial operations. Multiple regulations affecting 

the same manufacturer can quickly strain manufacturers’ profits and possibly cause an 

exit from the market. Table 12.7.2 lists the other DOE energy conservation standards that 

could also affect manufacturers of residential refrigeration products in the 3 years leading 

up to and after the compliance date of amended energy conservation standards for these 

products. 

a The compliance date for furnace and central air conditioning and heat pump products is 3 years from the 

date of publication of the final rule (approximately summer 2011). 
12-55

Table 12.7.2 Other DOE and Federal Actions Affecting the Furnace And Central 

Air Conditioning And Heat Pump Industry

Regulations Approximate 

Compliance Date

Estimated Total Industry 

Conversion Expense

Residential Boilers 2012 $4M (2007$)

Packaged Terminal Air Conditioners / 

Packaged Terminal Heat Pumps

2012 $17.3M (2007$)

Furnace Fan 2013 n/a

Room Air Conditioners 2014 n/a

Gas Fired and Electric Storage Water 

Heaters

2015 $95.4M (2009$)

12.7.3.2 Other Federal Regulations

Unites States Clean Air Act

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

the nation's air quality and the stratospheric ozone layer. The most significant of these 

additional regulations are the EPA mandated phase-out of hydro chlorofluorocarbons 

(HCFCs). The Act demands on a quarterly basis that any person who produced, imported, 

or exported certain substances, including HCFC refrigerants, must report the amount 

produced, imported and exported. Additionally, effective January 1, 2015, selling, 

manufacturing, and using any such substance is banned unless such substance has been 

used, recovered, and recycled; is used and entirely consumed in the production of other 

chemicals; or is used as a refrigerant in appliances manufactured prior to January 1, 2020. 

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

will be illegal. These bans could trigger design changes to natural or low global warming 

potential refrigerants and could impact the insulation used in products covered by this 

rulemaking.

Potential Climate Change and Greenhouse Gas Legislation

Many manufacturers expressed concern about potential climate change legislation 

that would exacerbate the manufacturer burden caused by more stringent energy 

conservation standards on air conditioning products. An example is the language in H.R. 

2454, the American Clean Energy and Security Act of 2009. The legislation included a 

phase-down of hydrofluorocarbons (HFCs) and would make the amended energy 

conservation standard levels considered in this rulemaking more difficult to achieve 

because few of the likely replacements for HFCs achieve comparable levels of efficiency, 

all other things being equal. Additionally, converting facilities to use HFC replacements 

would likely be disruptive to manufacturing facilities because of plant changes.

Furthermore, several of the potential replacements for HFCs are flammable, requiring 

new materials handling processes and plant design considerations.
12-56

12.7.3.3 Other Regulations That Could Impact Residential Refrigeration 

Manufacturers

While the cumulative regulatory burden focuses on the impacts on manufacturers 

of other Federal requirements, in this section DOE has described a number of other 

regulations below that could also impact products covered by this rulemaking

Low and Ultra-low NOx Standards

The South Coast Air Quality Management District (SCAQMD) is the air pollution 

control agency for all of Orange County and the urban portions of Los Angeles, Riverside 

and San Bernardino counties in California. The SCAQMD covers about half of the 

population of the state of California. 

In November 2009, the SCAQMD amended Rule 1111 - Reduction of NOx 

Emissions from Natural- Gas-Fired, Fan-Type Central Furnaces. The rule sets nitrogen 

oxide (NOx) emissions limits for the majority of new residential condensing, noncondensing and weatherized heating furnaces. The amended rule establishes for the first 

time a NOx limit on new furnaces installed in mobile homes. The new emissions limit 

will be phased in over six years, beginning in 2012.

The ruling applies to “residential and commercial fan-type central furnaces, 

requiring either single-phase or three-phase electric supply, used for comfort heating with 

a rated heat input capacity of less than 175,000 BTU per hour, or, for combination 

heating and cooling units, a cooling rate of less than 65,000 BTU per hour.”b The ruling 

prohibits the manufacture, supply, sale, offer for sell, or installation of non-compliant 

products. The effective dates for the SCAQMD Rule 1111 NOx limit are as follows:

Table 12.7.3 Furnace NOx Limits and Compliance Schedule for SCAQMD Rule 111

Compliance Date Equipment Category 

NOx Emission Limit

(nanograms/Joule)

10/1/2012 Mobile Home Furnace 40

10/1/2014 Condensing Furnace 14

10/2/2015 Non-condensing Furnace 14

10/3/2018 Weatherized Furnace 14

10/4/2016 Mobile Home Furnace 14

Furthermore, the SCAQMD has implemented Rule 1121 - Control Of Nitrogen 

Oxides From Residential Type, Natural Gas-Fired Water Heaters. These ultra-low NOx

regulations for residential water heaters limit NOx

b California Air Resources Board, South Coast AQMD List of Current Rules (2010) (Available at:

emissions for all direct-vent, power vent, 

and power direct-vent water heaters. Since January 2008, the regulation has prohibited 

the sale, distribute, sell, offer for sale, or install within the South Coast Air Quality 

http://www.arb.ca.gov/drdb/sc/cur.htm) (last accessed September 2010)
12-57

Management District any gas-fired water heaters unless the water heater is certified to a 

NOx emission level of less than or equal to 10 nanograms of NOx (23 lb per billion Btu of 

heat output), or 15 ppmv at 3% O2, dry (17.5 lb per billion Btu of heat input) c

. This 

regulation has forced manufacturers of water heaters and oilers to develop new product 

lines that comply with these NOx standards for sale in Southern California.

Additionally, other air quality management districts in California and other states are 

considering or have adopted NOx

Canadian Energy Conservation Standards

regulations modeled on SCAQMD Rule 1111 and Rule 

1121.

Manufacturers indicated that Canada has several programs in place that affect 

their regulatory burden. They indicated concern about Canadian energy efficiency 

regulation covering residential furnace, central air conditioner and heat pump, furnace 

fan, and residential boiler products.

NRCan enacted revised standards for residential furnaces in 2009. The standard 

applies to gas-fired central forced-air furnaces that use propane or natural gas and have an 

input of not more than 117.23 kW (400 000 Btu/h), but excluding mobile home furnaces.

The NRCan standard is more stringent than the U.S. energy efficiency standards effective

2006, 10 C.F.R. 430.32(e). NRCan requires a minimum AFUE of 90 percent, which is 

higher than the U.S. 78 percent AFUE standard effective 1992 and the 81 percent AFUE 

standard effective 2015d

.

NRCan enacted revised standards for central air conditioning in 2006. These 

standard align closely with the U.S. regulations for unitary systems and are not more 

stringent than the U.S. energy efficiency standards effective 2006, 10 C.F.R. 430.32(c). 

NRCan added reporting requirements for residential air handlers used with central 

space conditioning (heating and cooling) in 2010. Though no minimum efficiency 

standard is set, the Regulations contain reporting requirements for electricity 

consumption of the furnace blower motor and standby power for gas-fired furnaces.

NRCan recently had new residential boiler efficiency standards go into effect.

Additionally, NRCan has proposed additional prescriptive standards for 2012. These 

standards are listed in the table below.

c California Air Resources Board, South Coast AQMD List of Current Rules (2010) (Available at:

http://www.arb.ca.gov/drdb/sc/cur.htm) (last accessed September 2010)

d

 Natural Resources Canada, Canada's Energy Efficiency Regulations (2009) (Available at:

http://oee.nrcan.gc.ca/regulations/guide.cfm) (last accessed October 2010).
12-58

Table 12.7.4 NRCan Standards for Residential Boiler Efficiency

Boiler Type

Effective Date 

September 1, 2010

Effective Date

September 1, 2012

Gas Hot Water 82% AFUE;

No constant burning pilot

Automatic means for 

adjusting water temperature

Gas Hot Water equipped 

with tankless domestic water 

heating coils

82% AFUE; 

No constant burning pilot

Gas Steam 80% AFUE; 

No constant burning pilot

Oil Hot Water 84% AFUE Automatic means for 

adjusting water temperature

Oil Hot Water equipped with 

tankless domestic water 

heating coils

84% AFUE

Oil Steam 82% AFUE

Electric Hot Water n/a Automatic means for 

adjusting water temperature

NRCAn has attempted to harmonize with regulations coming into effect in the US 

September 1, 2012 as outlined in the US DOE’s Final Rule – Technical Amendment 

published July, 28, 2008. Canada’s minimum energy performance standard and 

prescriptive requirement for no constant burning pilot comes into effect 2 years earlier 

than in the U.S. The prescriptive requirement for an automatic means of adjusting water 

temperature comes into effect at the same time as in the U.S.e

12.8 CONCLUSION

The following sections summarize the impacts for the scenarios DOE believes are 

most likely to capture the range of impacts on residential furnace and central air 

conditioning and heat pump product manufacturers as a result of amended energy 

conservation standards. Table 12.8.1 summarizes the energy efficiency trial standard 

levels for which different markup scenarios were evaluated. Table 12.8.2 summarizes the 

standby mode and off mode trial standard levels for which different markup scenarios 

were evaluated.

Table 12.8.3 though Table 12.8.6 summarize the GRIM’s INPV results for each 

energy efficiency TSL. Table 12.8.7and Table 12.8.8 summarize the GRIM’s INPV 

results for each standby mode and off mode TSL. DOE notes that while these scenarios 

e NRCan’s boiler regulations and harmonization information can be found on Canada’s Office of Energy 

Efficiency’s Residential Gas, Oil-fired and Electric Boilers Energy Efficiency page at:

http://oee.nrcan.gc.ca/regulations/bulletin/boilers-june-2010.cfm
12-59

bound the range of most plausible impacts on manufacturers, there potentially could be 

circumstances which cause manufacturers to experience impacts outside of this range. 

Table 12.8.1 Summary of Active Mode TSLs*

Equipment Class Baseline TSL1 TSL2 TSL3 TSL4 TSL5 TSL6 

Split System Air Conditioners (SEER) 13 13.5 13.5 13/14 13/14 13/14 14/15 

Split System Heat Pumps (SEER) 13 13.5 13.5 13/14 13/14 13/14 14/15 

Single Package Air Conditioners 

(SEER)

13 13.5 13.5 14 14 14 15 

Single Package Heat Pumps (SEER) 13 13 13 14 14 14 15 

Non-Weatherized Gas Furnace (% 

AFUE)

80 13 13 14 14 14 15 

Mobile Home Furnace (% AFUE) 80 80 92/80 90/80 90/80 95/80 95/80 

Oil Furnace (% AFUE) 82 80 80/80 90/80 90/80 96/80 96/80 

* two values in a cell indicate the North/South regional standards

Table 12.8.2 Summary of Off Mode TSLs (in Watts)

Equipment Class TSL 1 TSL 2 TSL 3

Split System Air Conditioning 36 30 29

Split System Heat Pumps 33 33 32

Single Package Air Conditioning 36 30 29

Single Package Heat Pumps 33 33 32

Non-Weatherized Gas Furnace 10 10 9

Mobile Home Furnace 10 10 9

Oil Furnace 11 11 10
12-60

12.8.1 Energy Efficiency Standards

12.8.1.1 Conventional Products

Table 12.8.3 Changes in Industry Net Present Value for Conventional Products 

(Preservation of EBIT Markup Scenario)*

Units Base 

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV (2009$ 

millions) 8,347 8,354 7,847 7,936 7,893 7,857 7,685 6,855

Change in 

INPV

(2009$ 

millions) n/a 8 (500) (411) (454) (490) (662) (1,492)

(%) n/a 0.1 (6.0) (4.9) (5.4) (5.9) (7.9) (17.9)

*Values in parenthesis indicate negative numbers

Table 12.8.4 Changes in Industry Net Present Value for Conventional Products 

(Tiered Markup Scenario) *

Units Base 

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV (2009$ 

millions) 8,347 8,379 8,021 7,638 7,475 7,467 6,509 4,578

Change in 

INPV

(2009$ 

millions) n/a 33 (326) (709) (871) (879) (1,837) (3,768)

(%) n/a 0.4 (3.9) (8.5) (10.4) (10.5) (22.0) (45.1)

*Values in parenthesis indicate negative numbers

Sales of split-system air conditioners make up more than 60 percent of residential 

central cooling shipments, and non-weatherized gas furnaces make up more than 80 

percent of the residential furnace shipments, respectively. These two product classes are 

the largest drivers of INPV in the conventional product grouping. In the base case, the 

conventional products industry is estimated to have an INPV value of $8,347 million 

(2009$).

TSL 1 represents the efficiency levels for the conventional product classes that 

have the largest market share today. At TSL 1, DOE estimates impacts on INPV to be 

small, but positive. INPV impacts range from $33 million to $8 million, or a change in 

INPV of 0.4 percent to 0.1 percent. At this considered level, industry free cash flow is 

estimated to remain steady at $511 million for both the base case and standards case in 

the year before the TSL 1 compliance date (2015).

At TSL 1, the impacts on the industry are minor because manufacturers already 

ship products at TSL 1 efficiencies in high volumes. Eighty-one percent of all 

conventional HVAC products shipped today meet or exceed the TSL 1 standards. 

Additionally, an increase in standards from 13 SEER to 13.5 SEER for split-system air 

conditioning and heat pumps is expected to require no significant conversion costs. As a 

result, INPV remains mostly stable at this considered standard level.
12-61

TSL 2 has a higher standard for non-weatherized gas furnaces than TSL 1. This 

results in a greater negative impact on INPV. TSL requires non-weatherized gas furnaces 

to meet a 92-percent AFUE minimum efficiency in the North. DOE estimates TSL 2 

impacts on INPV to range from -$326 million to -$500 million, or a change in INPV of -

3.9 percent to -6.0 percent. At this level, industry free cash flow is estimated to decrease 

by approximately 5.3 percent to $484 million, compared to the base-case value of $511 

million, in the year 2015.

At TSL 2, for the non-weatherized gas furnace standard, manufacturers may incur 

elevated conversion costs as they redesign a 92-percent AFUE furnace product to meet 

the requirements of the builder market and adjust their product families accordingly in 

the North. At 92-percent AFUE, these furnaces would require a secondary heat 

exchanger, and, when compared to a 90-percent AFUE design, the heat exchangers 

would need to be sized up. DOE estimates that at this level, non-weatherized gas furnace 

conversion costs total approximately $20 million for the industry. These conversion 

costs, along with changes in shipments due to standards, account for much of the drop in 

INPV from TSL 1 to TSL 2. 

TSL 3 incorporates regional standards for split-system air conditioning 

and furnace products. Compared to the baseline, TSL 3 proposes a higher air 

conditioning and heat pump standard in the South (14 SEER minimum) and a higher 

furnace standard in the North (90-percent AFUE minimum). At TSL 3, DOE estimates 

impacts on INPV to range from -$411 million to -$709 million, or a change in INPV of -

4.9 percent to -8.5 percent. At this considered level, industry free cash flow is estimated 

to decrease by approximately 5.8 percent to $481 million, compared to the base-case 

value of $511 million, in the year leading up to the year in which compliance with 

considered energy conservation standards would be required (2015).

Both markup scenarios in the GRIM for the energy efficiency standards at 

TSL 3 assume that a commoditization of 14 SEER air conditioning units in the South 

would put downward pressure on margins for 14 SEER units sold in all regions. 

Similarly, the 90-percent AFUE standard for non-weatherized gas furnaces in the North 

would negatively affect margins for non-weatherized gas furnace units sold in all regions. 

This impact on markups is more severe in the tiered scenario, because the change in the 

standard also compresses markups on higher-AFUE products, which are effectively 

demoted in the “good, better, best” sales model. As a result, INPV decreases by 8.5

percent in the tiered markup scenario, compared to 4.9 percent in the preservation of 

EBIT scenario.

TSL 4 represents the consensus agreement level and incorporates 

accelerated compliance dates. The standards are set at the same level as TSL 3, except 

that TSL 4 also includes EER standards for central air conditioners in the hot-dry region. 

In addition, the furnace standards are modeled to take effect in 2013, and the air 

conditioning and heat pump standards are modeled to take effect in 2015, instead of the 

2016 compliance dates used in TSL 3. At TSL 4, DOE estimates impacts on INPV to 
12-62

range -$454 million to -$871 million, or a change in INPV of -5.4 percent to -10.4

percent. At this level, industry free cash flow is estimated to decrease by approximately 

9.6 percent to $462 million, compared to the base-case value of $511 million, in the year 

2015.

To comply with the earlier compliance dates, manufacturers must make earlier 

investments in product conversions, which negatively affect INPV because of 

discounting effects. Additionally, the accelerated schedule for amended standards leads to 

earlier commoditization of residential furnace, central air conditioner, and heat pump 

products. As a result, the INPV value is slightly more negative in TSL 4 than in TSL 3 

for both the preservation of EBIT scenario and the tiered markups scenario.

TSL 5 includes higher furnace standards than TSL 4. Non-weatherized gas 

furnace standards would increase to 95-percent AFUE. Additionally, TSL 5 lacks the 

accelerated compliance dates associated with TSL 4. All HVAC standards in TSL 5 

would require compliance in 2016. At TSL 5, DOE estimates impacts on INPV to range 

from -$490 million to -$879 million, or a change in INPV of -5.9 percent to -10.5 

percent. At this considered level, industry free cash flow is estimated to decrease by 

approximately 9.7 percent to $461 million, compared to the base-case value of $511 

million, in the year 2015.

At 95-percent AFUE, non-weatherized gas furnace efficiency would be one 

efficiency level below max-tech. To comply with such a standard, manufacturers would 

need to increase heat exchanger size up to the physical constraints of the furnace 

cabinets. Furnace manufacturers would need to upgrade their 95-percent AFUE 

production lines to meet demand. Additionally, manufacturers expect this efficiency level 

would require significant R&D costs to redesign and convert a premium, feature-loaded 

product into a basic value-line product, which would be demanded by the builder market. 

As a result, industry conversion costs could grow from $28 million at TSL 4 to $77 

million at TSL 5. INPV becomes slightly more negative from TSL 4 to TSL 5. 

TSL 6 elevates the standard for air conditioning and heat pumps over TSL 5 while 

maintaining the same standards for all furnace product classes. TSL 6 is the most 

aggressive regional standard considered in this rulemaking (although TSL 7 has more 

stringent standards, the standards in TSL 7 are national rather than regional). At TSL 6, 

DOE estimates impacts on INPV to range from -$662 million to -$1837 million, or a 

change in INPV of -7.9 percent to -22.0 percent. At this considered level, industry free 

cash flow is estimated to decrease by approximately 24.7 percent to $385 million, 

compared to the base-case value of $511 million, in the year 2015.

In the base case, 73 percent of split-system air conditioning shipments in the 

North are below 14 SEER, and 84 percent of split-system air conditioning shipments in 

the South are below 15 SEER. Increasing the minimum efficiency to 14 SEER in the 

North and 15 SEER in the South requires significantly more capital expenditure from 

manufacturers. At TSL 6, manufacturers would need to redesign their highest-volume 
12-63

product lines in both the South and the North. There are multiple design paths that 

manufacturer could take; however, the changes will likely involve the addition of twostage compressors, the enlargement of heat exchangers, the application of moresophisticated controls, the incorporation of microchannel technology, or some 

combination of these options. Some manufacturers indicated that new production 

facilities would be necessary at this potential standard level. 

TSL 7 represents the max-tech efficiency level for all product classes. At 

TSL 7, DOE estimates impacts on INPV to range from -$1,492 million to -$3,768 

million, or a change in INPV of -17.9 percent to -45.1 percent. At this considered level, 

industry free cash flow is estimated to decrease by approximately 65.9 percent to $174 

million, compared to the base-case value of $511 million, in the year 2015.

At TSL 7, the industry incurs significant R&D costs and loses the ability to 

differentiate products based on efficiency. For central air conditioning systems, 

manufacturers would likely have to move to add a second compressor, incorporate 

inverter technology, or make their product significantly larger. For furnaces, 

manufacturers would likely have to incorporate burner modulation technology, which 

would include adding modulating gas valves, variable speed inducer fans, and moresophisticated controls. These potential standard levels would require much higher R&D 

and product design expenditures by manufacturers. It could be difficult for all major 

manufacturers to justify the investments necessary to reach max-tech. A few 

manufacturers indicated that building a new facility would create less business disruption 

risk than attempting to completely redesign and upgrade existing facilities. Additionally, 

some manufacturers noted that lower labor rates in Mexico and other countries abroad 

may entice them to move their production facilities outside of the U.S. There was general 

agreement that the high conversion costs and more expensive components required in 

TSL 7 could also make foreign-based technologies, which have traditionally been more 

expensive, more attractive in the domestic market. 

12.8.1.2 Niche Furnace Products

Table 12.8.5 Changes in Industry Net Present Value for Niche Products 

(Preservation of EBIT Markup Scenario) *

Units Base 

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV (2009$ 

millions) 149 149 151 132 125 131 131 109

Change in 

INPV

(2009$ 

millions) n/a 0 2 (17) (24) (18) (18) (40)

(%) n/a 0.0 1.2 (11.6) (16.4) (12.1) (12.1) (26.7)

*Values in parenthesis indicate negative numbers
12-64

Table 12.8.6 Changes in Industry Net Present Value for Niche Products

(Tiered Markup Scenario) *

Units Base 

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV (2009$ 

millions) 149 149 151 129 120 114 114 94

Change in 

INPV

(2009$ 

millions) n/a (0) 2 (20) (29) (36) (36) (55)

(%) n/a (0.0) 1.4 (13.5) (19.6) (23.8) (23.8) (36.7)

*Values in parenthesis indicate negative numbers

At TSL 1 and TSL 2, the standards-case efficiency remains at the baseline level 

for both mobile home furnaces and oil furnaces. There are no conversion costs, and the 

INPV varies very little from the baseline value. 

At TSL 3, the oil furnace standard increases to 83-percent AFUE, while the 

mobile home furnace standard increases to 90-percent AFUE in the North. At TSL 3, 

DOE estimates impacts on INPV to range from -$17 million to -$20 million, or a change 

in INPV of -11.6 percent to -13.5 percent. At this level, industry free cash flow is 

estimated to decrease by approximately 54.0 percent to $5.1 million, compared to the 

base-case value of $11.0 million, in the year 2015. 

TSL 3 would require the addition of a secondary heat exchanger for mobile home 

furnace products sold in the North. As a result, mobile home furnace manufacturers could 

incur conversion costs for redesigns and tooling. Oil furnace manufacturers would likely 

need to increase the surface area of heat exchangers. DOE estimates conversion costs for 

the entire industry to meet the TSL 3 to be $15 million.

TSL 4 represents the consensus agreement level and incorporates accelerated 

compliance dates. The mobile home furnace standard and the oil furnace standard do not 

vary from TSL 3. DOE estimates impacts on INPV to range from -$24 million to -$29 

million, or a change in INPV of -16.4 percent to -19.6 percent. At this level, industry free 

cash flow is estimated to decrease by approximately 11.5 percent to $9.8 million, 

compared to the base-case value of $11.0 million, in the year 2015. 

The accelerated compliance dates of TSL 4 lead to earlier investments by 

manufacturers. The production line changes necessary to produce secondary heat 

exchangers for mobile home furnace products and larger heat exchanges for oil furnaces 

would need to occur before the standards year 2013. Manufacturers could incur 

conversion costs for redesigns and additional tooling totaling $15 million. There is a 

decrease in INPV in TSL 4, as compared to TSL 3, due to the earlier commoditization 

impacts of the accelerated compliance dates. In TSL 4, INPV decreases 4.8 percent to 

6.3 percent lower than in TSL 3.

TSL 5 and TSL 6 represent an increase in standards for mobile home furnaces and 

oil furnaces above the level set in TSL 1 through TSL 4. The standard in the North for 

mobile home furnaces increases to 96-percent AFUE, and the national standard for oil 
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furnaces increases to 85-percent AFUE. TSL 5 and TSL 6 require compliance in 2016. 

DOE estimates impacts on INPV to range from -$18 million to -$36 million, or a change 

in INPV of -12.1 percent to -23.8 percent. At this level, industry free cash flow is 

estimated to decrease by approximately 86.0 percent to $1.6 million, compared to the 

base-case value of $11 million, in the year 2015.

TSL 5 and TSL 6 would raise the standard in the North for mobile home furnaces 

to the max-tech level (i.e., 96-percent AFUE). At this level, all mobile home furnaces in 

the North would be required to be condensing. This change would drive the increase in 

conversion cost, as manufacturers work on condensing furnace designs that function 

within the physical dimension and price constraints of the mobile home market. Mobile 

home furnace manufacturers would no longer be able to differentiate products based on 

efficiency. In interviews, manufacturers noted that the loss of product differentiation 

would lead to increased focus on cost competitiveness. Given the size of the mobile home 

furnace market (approximately 120,000 units per year) and manufacturer feedback that 

the mobile home market is highly price sensitive, a number of manufacturers could 

choose to exit the market rather than compete at this efficiency level. Additionally, TSL 5 

and TSL 6 would increase the standard for oil furnaces to 85-percent AFUE. To reach 

this level, manufacturers would continue to increase the surface area of heat exchangers, 

incurring additional production costs and higher raw material costs. Conversion costs for 

TSL 5 and TSL 6 are $24 million. At this cost, it is possible that some oil furnace 

manufacturers would exit the business. 

TSL 7 raises the standard for oil furnaces and mobile home furnaces to max-tech. 

DOE estimates impacts on INPV to range -$40 million to -$55 million, or a change in 

INPV of -26.7 percent to -36.7 percent. At this considered level, industry free cash flow 

is estimated to decrease by approximately 193 percent to -$9.2 million, compared to the 

base-case value of $11 million, in the year 2015.

TSL 7 sets a national standard for oil furnaces at the max-tech level (i.e., 97-

percent AFUE). This efficiency level would require the development of condensing oil 

furnaces as the baseline product. DOE was only able to identify one domestic 

manufacturer offering a condensing oil furnace. The development of cost-effective, 

reliable, and durable oil furnace products would require significant capital expenditures 

by a majority of the industry. It is unclear how many manufacturers would make the 

product conversion investment to compete in a market that supplies fewer than 80,000 

units/year and, according to most manufacturers, is shrinking. However, given the limited 

size of the oil furnace market and the market’s declining shipments, it could be expected 

that a number of manufacturers would choose to leave the market rather than compete at 

this efficiency level. DOE expects a similar effect in the mobile home furnace market.

12.8.1.1 SDHV Products

Small-duct, high-velocity systems serve a niche within the residential air 

conditioning market. A SDHV system consists of a non-conventional indoor unit and air 

distribution system (produced by the SDHV manufacturer) mated to a conventional 

outdoor unit (produced by split system manufacturers). These SDHV systems typically 
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make use of flexible ducting and operate at a higher static pressure than conventional air 

conditioning systems. This product class makes up less than 0.5 percent of central air 

conditioning shipments. DOE estimates the total market size to be less than 30,000 units 

per year. Given the small size of the SDHV industry and the limited about of public data, 

DOE had insufficient information to perform an analysis using the GRIM. However, 

DOE has prepared a qualitative assessment of the impacts of an amended energy 

conservation standard.

SDHV systems are primarily installed in existing structures that do not have air 

conditioning duct work. In this application, SDHV systems are often a more costeffective solution for centralized cooling because conventional systems may require 

substantial installation and retrofit costs to install ducting. The SDHV system delivers 

conditioned air via small diameter flexible tubing, which requires less space than 

conventional ductwork. SDHV systems are often paired with hydronic heat, radiant heat, 

and ground temperature heat pump systems. Historically, approximately 80 percent of 

shipments have been for the retrofit market, and 20 percent of shipments have been for 

the new construction market. 

DOE identified three manufacturers of SDHV systems that serve the U.S. market.

The two domestic manufacturers, Unico Systems and SpacePak , serve the majority of 

the market. SpacePak is a subsidiary of MesTek Inc., a U.S. holding company with over 

30 specialty manufacturing brands. Unico is a small business, as defined by the SBA.

DOE’s analysis of AHRI Directory product listings indicates that the primary 

difference between SDHV products rated at 11 SEER and SDHV products rated above 11 

SEER is the paired condensing unit. The indoor unit, which is the component designed 

and manufactured by SpacePak and Unico, does not change as the AHRI-certified 

efficiency increases. SpacePak and Unico are reaching higher efficiencies by pairing their 

products with larger condensing units, which are produced by conventional air 

conditioning and heat pump manufacturers. 

According to SDHV manufacturers, the small size of the SDHV industry limits 

influence on key suppliers. As a result, SDHV manufacturers must choose from stock fan 

motors, compressors, and products that are optimized for other applications and 

industries. The selection of available components limits the technology options available 

to SDHV manufacturers, thereby constraining the manufacturers’ ability to achieve 

efficiencies above 11 SEER through improved product design. Interviewed SDHV 

manufacturers indicated that they are near max-tech for the SDHV indoor unit with 

today’s standards and available components.

In 2004, both Unico and SpacePak petitioned DOE’s Office of Hearings and 

Appeals (OHA) for exception relief from the 13 SEER energy efficiency standard found 

at 10 CFR 430.32(c)(2), with which compliance was required for products manufactured 

on or after January 23, 2006. OHA granted both petitions on October 14, 2004.

Accordingly, the manufacturers were authorized to produce equipment that performed at 

11 SEER / 6.8 HSPF and above. In their 2004 application for exemption, SpacePak and 
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Unico both indicated that a 13 SEER standard would create significant hardships for the 

SDHV industry. SpacePak wrote in its application for exception relief that an absence of 

relief would lead to “the loss of all sales within the Unites States.” As part of the 2004 

OHA Decision and Order (case #TEE-0010), Lennox International filed comments 

stating that “it agrees these [SDHV] products would be unfairly burdened by...the 13 

SEER/7.7 HSPF minimum level.” 

Since 2004, SDHV manufacturers have been able to reach efficiencies of 13 

SEER, but the vast majority of products listed in the AHRI Directory are below 13 SEER 

(see chapter 3 of the DFR TSD for a distribution of SDHV systems by efficiency level). 

This improved efficiency is primarily the result of pairing their products with higherefficiency outdoor units produced by other manufacturers. One manufacturer has 

incorporated variable-speed technology to improve product efficiency. However, overall, 

SDHV manufacturers still face many of the same challenges they faced in 2004 and have 

limited options for further improving the efficiency of the air handling unit, which is the 

only component designed and produced by SDHV manufacturers. As a result, higher 

standards would force SDHV manufactures to pair their products with more expensive, 

higher-efficiency outdoor units. TSL 1 through TSL 5 would require only the baseline 

efficiency level (13 SEER), while TSL 6 and TSL 7 would increase the level to 14 SEER 

and 14.5 SEER, respectively. DOE believes the increases represented by TSL 6 and TSL 

7 would significantly adversely impact the financial standing of SDHV manufacturers. 

As discussed in 2004 application for exemption, such an increase would likely 

significantly depress shipments because it would require additional controls and a much 

more expensive outdoor unit. As a result of the higher costs, manufacturers would be 

forced to spread fixed costs over decreasing shipment volumes. They would face 

increasingly difficult decisions to invest resources toward what would likely be a 

contracting market.

12.8.2 Standby Mode & Off Mode Standards

Table 12.8.7 Changes in Industry Net Present Value for Niche Products 

(Preservation of Gross Margin Percentage Markup Scenario) *

Units Base 

Case

Trial Standard Level

1 2 3

INPV (2009$ 

millions) 8,711 8,715 8,716 8,734 

Change in 

INPV

(2009$ 

millions) n/a 4 5 23 

(%) n/a 0.05 0.06 0.26

*Values in parenthesis indicate negative numbers
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Table 12.8.8 Changes in Industry Net Present Value for Niche Products

(Preservation of EBIT Markup Scenario) *

Units Base 

Case

Trial Standard Level

1 2 3

INPV (2009$ 

millions) 8,711 8,458 8,457 8,456 

Change in 

INPV

(2009$ 

millions) n/a (253) (253) (255)

(%) n/a (2.91) (2.91) (2.93)

*Values in parenthesis indicate negative numbers

The preservation of gross margin percentage and preservation of EBIT markup 

scenarios for the standby mode and off mode analysis provide similar results. DOE 

estimates impacts on INPV to range from $23 million to -$255 million, or a change in 

INPV of 0.26 percent to -2.93 percent. 

These results include the impacts of conversion costs, estimated at $2.8 million 

for the industry. DOE estimated total conversion costs to be similar at all three standby 

mode and off mode TSLs, because the levels of R&D, testing, and compliance 

expenditures do not vary dramatically. Furthermore, DOE did not identify significant 

changes to manufacturer production processes that would result from standby mode and 

off mode standards. In general, the range of potential impacts resulting from the standby 

mode and off mode standards is small when compared to the range of potential impacts 

resulting from the energy efficiency standards.
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1 Securities and Exchange Commission, Annual 10-K Reports, Various Years,

Washington DC. <www.sec.gov>.

2 Standard and Poors Financial Services LLC, Company Credit Ratings, Various 

Companies, New York, NY. < www2.standardandpoors.com>.

3 Dun & Bradstreet, Inc., Company Profiles, Various Companies. 

<www.dnb.com/US/index.asp>

4 Annual Survey of Manufacturing: 2006. American FactFinder. 2008. Bureau of 

the Census. < http://factfinder.census.gov/servlet/IBQTable?_bm=y&-

ds_name=AM0631GS101>.

5 The size standards are available on the SBA’s website at 

www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.

6 McKinsey & Company, Inc. Valuation: Measuring and Managing the Value of

Companies, 3rd Edition, Copeland, Koller, Murrin. New York: John Wiley & Sons, 

2000.