2

- i CHAPTER 2. ANALYTICAL FRAMEWORK

TABLE OF CONTENTS

2.1 INTRODUCTION

................................ ................................ ................................ .............. 2

2.2 Background

................................ ................................ ................................ ......................... 3

2.3 REGIONS FOR ANALYSIS

................................ ................................ .............................. 4

2.4 MARK ET AND TECHNOLOGY ASSESSMENT

................................ ........................... 7

2.4.1 Product Classes and Scope of Coverage

................................ ................................ . 7

2.4.2 Technology Assessment

................................ ................................ .......................... 8

2.5 SCREENING ANALYSIS

................................ ................................ ................................ . 8

2.6 ENGINE ERING ANALYSIS

................................ ................................ ............................. 8

2.6.1 Baseline Models

................................ ................................ ................................ ...... 9

2.6.2 Manufacturing Cost Analysis

................................ ................................ ................. 9

2.7 MARKUPS ANALYSIS

................................ ................................ ................................ .. 10

2.8 ENERGY U SE ANALYSIS

................................ ................................ ............................. 10

2.9 LIFE

- CYCLE COST AND PAYBACK PERIOD ANALYSES

................................ ..... 10

2.10 SHIPMENTS ANALYSIS

................................ ................................ ............................... 12

2.11 NATIONAL IMPACT ANALYSIS

................................ ................................ ................. 12

2.11.1 Efficiency Scenarios and Trends

................................ ................................ .......... 12

2.11.2 National Energy Savings Analysis

................................ ................................ ........ 13

2.11.3 Net Present Value Analysis

................................ ................................ .................. 13

2.12 CONSUMER SUBGROUP ANALYSIS

................................ ................................ ......... 14

2.13 MANUFACTURER IMPACT ANALYSIS

................................ ................................ ..... 14

2.14 UTILITY IMPACT ANALYSIS

................................ ................................ ...................... 14

2.15 EMPLOYMENT IMPACT ANALYSIS

................................ ................................ .......... 15

2.16 ENVIRONMENTAL ASSESSMENT

................................ ................................ ............. 15

2. 16.1 Carbon Dioxide

................................ ................................ ................................ ..... 15

2.16.2 Sulfur Dioxide

................................ ................................ ................................ ....... 16

2.16.3 Nitrogen Oxides

................................ ................................ ................................ .... 16

2.16.4 Mercury

................................ ................................ ................................ ................. 16

2.16.5 Particulate Matter

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

2.17 Monetization of Emissions Reduction Benefits

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

2.18 REGULATORY IMPACT ANALYSIS

................................ ................................ .......... 18

2.19 REGIONAL STANDARDS IMPACT ANALYSIS

................................ ........................ 19

List o f Tables Table 2.3.1 Regions for Direct Final Rule Analysis of Furnace Standards

................................ ... 5

Tabl e 2.3.2 Regions for Direct Final Rule Analysis of Split

- System Central Air Conditioner and Heat Pump Standards

................................ ................................ ................................ ...................... 6

List of Figures Figure 2.3.1 Map of the Regions for Direct Final Rule Analysis of Furnace Standards

................ 5 Figure 2.3.2 Map of the Regions for Direct Final Rule Analysis of Split

- System Central Air Conditioner and Heat Pump Standards

................................ ................................ ............................ 62

- 2 CHAPTER 2. AN ALYTICAL FRAMEWORK

2.1 INTRODUCTION

Section 6295(o)(2)(A) of the Energy Policy and Conservation Act, as amended, 42 USC

6291 et. seq.

The following analyses were performed as part of the preliminary analyses and described in the preliminary technical support document (TSD) for central air conditioners and heat pumps

before the direct final rule stage and are newly developed for furnaces for the direct final rule

. For central air conditioners and heat pumps t he analyses were revised for the direct final rule and are reported in this TSD. , requires that when prescribing new or amended energy conservation standards for covered products, the U.S. Department of En ergy (DOE) promulgate standards that achieve the maximum improvements in energy efficiency that are technologically feasible and economically justified. This chapter provides a description of the analytical framework that DOE is using to

evaluate amended e nergy conservation standards for residential furnaces and central air conditioners and heat pumps

. Th is chapter sets forth the methodology, analytical tools, and relationships among the various analyses that are part of this rulemaking.

**•** A market and technology assessment to characterize the relevant products, their markets and technology options for improving their energy efficiency, including prototype designs.

**•** A screening analysis to review each technology option and determine if it is technologically feasible; is practica b l e to manufacture, install, and service; would adversely affect product utility or product availability; or would have adverse impacts on health and safety.

**•** An engineering analysis to develop relationships that show the manufacturer’s cost of achieving incre ased efficiency.

**•** An energy use analysis to determine the annual energy use of the considered products in a representative set of users

.

**•** A markup analysis to develop the distribution channel markups used to determine final customer pric e s

.

**•** LCC and payback period (PBP) analyses to calculate the savings in operating costs (less any increase in maintenance and repair costs) at the consumer level throughout the life of the covered products compared with any increase in the installed cost for the products likely to result directly from imposition of a standard.

**•** A shipments analysis to forecast product shipments, both with and without amended energy conservation standards

.

**•** A national impact analysis (NIA) to assess the aggregate impacts at the national level of

considered standards in ter ms of the NPV of total consumer benefits and national energy savings (NES)

.2

- 3 **•** A preliminary manufacturer impact analysis (MIA) to assess the potential impacts of energy conservation standards on manufacturers, such as impacts on capital conversion expenditur es, marketing costs, shipments, and research and development costs.

The analyses performed in the subsequent direct final rule stage include those listed

below.

**•** A consumer subgroup analysis to evaluate variations in customer characteristics that might cau se a standard to affect particular consumer sub

- populations (such as low

income households) differently than the overall population.

**•** A n MIA to estimate the financial impact of standards on manufacturers and calculate d impacts on competition, employment, an d manufacturing capacity.

**•** A utility impact analysis to estimate selected effects of the considered standards on

electric utilities.

**•** An employment impact analysis to assess the aggregate impacts of the considered

standards on national employment.

**•** An environmental impact analysis to assess the effects of amended energy conservation

standards on emissions of carbon dioxide (CO 2 )

, nitrogen oxides (NO

x

**•** An e missions m onetization that estimates the economic value of reductions in CO ), and mercury (Hg).

2 and

NO X

**•** A regulatory impact analysis (RIA) to evaluate major alternatives to amended energy conservation standards, to assess whether such alternatives could achieve substantially the same regulatory goal at a lower cost. emissions from the considered standards.

**•** A regional standards impact analysis to examine the impacts of regional standards on

distributors , dealers, contractors and installers

. Analysis of potential impacts of regional standards on manufacturers and consumers, as required by EPCA, was conducted as part of the MIA and LCC and PBP analyses, respectively.

2.2 BACKGROUND

The analytical framework pertaining to residential furnaces w as developed in the Energy Conservation Standards for Residential Furnaces Rulemaking Analysis Plan (March 11, 2010).

DOE announced the availability of the residential furnaces rulemaking analysis plan on its website. DOE presented this information during a public meeting held on March 31, 2010. A PDF of the rulemaking analysis plan is available at http://www1.eere.energy.gov/buildings /appliance_standards/residential/furnaces_nopm_rulemak ing_analysis.html

.

DOE developed th e analytical framework pertaining to residential central air conditioners and heat pumps in the Rulemaking Framework for Residential Central Air Conditioners and Hea t Pumps (June 2, 2008). DOE announced the availability of the residential central air conditioners and heat pumps framework document in a Notice of Public Meeting and Availability of a Framework Document published in the Federal Register on June 6, 2008. 7 3 FR 32243

– 45.2

- 4 DOE presented the analytical approach to interested parties during a public meeting held on June 12, 2008. The framework document is available at http://www1.eere.energy.gov/buildings/appliance_standards/residential/pdfs/cac_framework.pdf

. DOE used comments gathered during the framework public meeting as well as additional information for the preliminary analysis stage. DOE announced t he notice of public meeting and the availability of the preliminary technical support document (TSD) on March 25, 2010. 75 FR

14368 . The preliminary TSD is available at http://www1.eere.energy.gov/buildings/appliance_standards/residential/cac_tsd_031010.html

.

DOE received numerous comments in response to the public meetings for both central air conditioners and heat pumps and furnaces and decided to combine the two rulemakings for the

final rule stage.

The following sections provide a brief overview of the different analytical approaches of this rulemaking analysis plan. DOE has used the most reliable data available at the time of each analysis i n this rulemaking. DOE has also considered the submissions of additional data from interested parties during the rulemaking process.

2.3 REGIONS FOR ANALYSIS

EISA 2007 amended EPCA to allow for the establishment of a single more

- restrictive regional standar d in addition to the base national standard for furnaces and up to two more

restrictive regional standards in addition to the base national standard for residential central air conditioners and heat pumps. (42 U.S.C. 6295(o)(6)(B)) Further, EPCA mandates t hat a regional standard must produce significant energy savings in comparison to a single national standard and provides that DOE must determine that the additional standards are economically justified and consider the impact of the additional regional sta ndards on consumers, manufacturers, and other market participants, including product distributors, dealers, contractors, and instal lers. Accordingly, DOE has addressed the potential impacts from regional standards in the relevant

direct final rule analyses , including the mark

- ups to determine product price, the LCC and payback period analysis, the national impact analysis (NIA), and the manufacturer impact analysis (MIA).

The allocation of individual States to the regions is similar to the evaluation met hodology DOE used in exploring regional standards in the November 2007 Rule, which was largely based on whether a State’s annual heating HDD average is above or below 5,000. 72 FR 65136, 65146

- 65147 (Nov. 19, 2007). This level offers a rough threshold poi nt at which space heating demands are significant enough to require longer operation of heating systems, which provides a basis for utilization of higher

- efficiency systems. For the direct final rule analysis, DOE made two changes from the November 2007 Ru le methodology to establish regions for furnaces, which

are contained in Table 2.3.1 and displayed in Figure 2.3.1 . The first was moving Nevada from the Northern region to the Southern region, and the second was moving West Virginia from the Southern regio n to the Northern region. These changes better reflect the climate characteristics of

these two States ; West Virginia has on average more than 5,000 HDD, and Nevada’s major population areas have fewer than 5,000 HDD.2

- 5 Table 2.3

. 1 Regions for Direct Final Rule Analysis of Furnace Standards

Northern Region States (Rest of Country) Southern Region States

Alaska Pennsylvania Alabama

Colorado Rhode Island Arizona

Connecticut South Dakota Arkansas

Idaho Utah California

Illinois Vermont Delaware

Indiana Washington Dist. of Columbia

Iowa West Virginia Florida

Kansas Wisconsin Georgia

Maine Wyoming Hawaii

Massachusetts Kentucky Michigan Louisiana

Minnesota Maryland

Missouri Mississippi

Montana Nevada

Nebraska New Mexico New Hampshire North Carolina New Jersey Oklahoma

New York South Carolina

North Dakota Tennessee

Ohio Texas Oregon Virginia

Figure 2.3.1 Map of the Regions for the Final Rule Analysis of Furnace Standards

S ince s imilar manufacturers produce both furnaces and central air conditioners and heat pumps and use the same distribution network

, u sing the same regional allocation of States, as2

- 6 compared to the “rest of country” national standard for the northern region, woul d be easier for manufacturers and distributors to implement and would also help to minimize consumer confusion. Additionally, regional standards may shift enforcement from the manufacturer to the point of sale or place of installation ; and a single boundar y between regions would reduce the

motivation for non

- compliance while simplify ing the overall enforcement of regional standards.

Additonally, for cooling equipment performance, the annual number of operating hours and relative humidity during those oper ating hours are the most important regional variations for cooling equipment performance ; t herefore, DOE established two regions ( i.e. , a “hot

- dry” region

and a “hot

- humid” region) in the south based upon these factors, in addition to a “rest of country” r egion ( i.e. , northern region), composed of the remaining States.

Table 2.3

. 2 Regions for Direct Final Rule Analysis of Split

- System Central Air Conditioner and Heat Pump Standards

Northern Region States (Rest of Country) Southeastern Region States (Hot

- Humid)* Southwestern Region States

(Hot

- Dry)*

Alaska New York Alabama Arizona

Colorado North Dakota Arkansas California

Connecticut Ohio Delaware Nevada

Idaho Oregon District of

Columbia New Mexico

Illinois Pennsylvania Florida

Indiana Rhode Island Georgia

Iowa South Dakota Hawaii

Kansas Utah Kentucky

Maine Vermont Louisiana

Massachusetts Washington Maryland Michigan West Virginia Mississippi

Minnesota Wisconsin North Carolina

Missouri Wyoming Oklahoma

Montana South Carolina

Nebraska Tennessee New Hampshire Texas New Jersey Virginia
*The combined southeastern and southwestern regions for split

- system central air conditioners and heat pumps correspond to the southern region for furnaces.2

- 7 Figure 2.3.2 Map of the Regions for the Direct Final Rule Analysis of Split

- System Central Air Conditioners and Heat Pumps

2.4 MARKET AND TECHNOLOG Y ASSESSMENT

When DOE begins an energy conservation standards rulemaking, it develops information that provides an overall picture of the market for the products considered, including the nature of the products, market characteristics, and industry structure. This activity consists of both quantitative and qualitative efforts based primaril y on publicly available information. The market assessment examined manufacturers, trade associations, and the quantities and types of products

sold and offered for sale.

DOE reviewed relevant literature and interviewed manufacturers to develop an overall picture of the residential furnaces and central air conditioners and heat pumps industries in the United States. Industry publications and trade journals, government agencies, and trade organizations provided the bulk of the information, including (1) manufacturers and their market shares, (2) shipments by product type and cooling capacity, (3) product information, and (4) industry trends. The analyse s developed as part of the market and technology assessment are described in chapter 3 of the TSD.

2.4.1 Product Classes and Scope of Coverage

When evaluating and establishing energy conservation standar ds, DOE generally divides covered products into product classes by the type of energy used, capacity, or other performance

related features that affect efficiency. Different energy conservation standards may apply to different product classes. (42 U.S.C. 6 295(q))

.2

- 8 Regarding residential air conditioners and heat pumps, DOE identified seven product classes for this rulemaking: (1) split

- system air conditioners, (2) split

- system heat pumps, (3) single

- package air conditioners, (4) single

- package heat pumps, ( 5) small

- duct high

- velocity (SDHV) systems, (6) space

- constrained air conditioners, and (7) space

- constrained heat pumps.

For furnaces, DOE considered the following product classes: (1) non

- weatherized gas

furnaces , (2) weatherized gas furnaces (3) non

- weatherized oil fired furnaces (4) weatherized oil

furnaces (5) gas fired mobile home furnaces (6) oil mobile home furnaces , and (7) electric

furnaces

.

2.4.2 Technology Assessment

As part of the market and technology assessment, DOE developed a list of tech nologies to consider for improving the efficiency or reducing the standby and off mode power consumption of central air conditioners and heat pumps and furnaces

. DOE removed from consideration those technology options whose energy consumption could not be adequately measured by the existing DOE test procedure. Then DOE removed technologies that do not change or affect the energy efficiency metrics of central air conditioners and heat pumps or furnaces . Chapter 3 of the TSD includes the detailed list of all techno logy options DOE

identified for this rulemaking.

2.5 SCREENING ANALYSIS

The purpose of the screening analysis is to evaluate the technologies identified in the technology assessment to determine which options to consider further in the analysis and whi ch options to screen out. DOE consulted with industry, technical experts, and other interested parties in developing a list of energy

- saving technologies for the technology assessment. DOE then applied the screening criteria to determine which technologies were unsuitable for further consideration in this rulemaking. Chapter 4 of the TSD, the screening analysis, contains details about DOE’s screening criteria.

The screening analysis examines whether various technologies (1) are technologically feasible; (2) are practicable to manufacture, install, and service; (3) have an adverse impact on product utility or availability; and (4) have adverse impacts on health and safety. In consultation with interested parties, DOE reviewed the list of residential furnace a nd central air conditioner and heat pump technologies according to these criteria. In the engineering analysis, DOE further considers the efficiency

- enhancement technologies that it did not eliminate in the screening analysis.

2.6 ENGINEERING ANALYSIS

The engineering analysis (chapter 5 of the TSD) establishes the relationship between the manufacturing production cost and the efficiency for each residential furnace and central air conditioner and heat pump. This relationship serves as the basis for cost

- benefit calculations in terms of individual consumers, manufacturers, and the n ation . Chapter 5 discusses the product classes analyzed, representative baseline units, incremental efficiency levels, methodology used2

- 9 to develop manufacturing production cost s, cost

- efficiency relationships , impact of efficiency improvements on the considered products, and methodology used to extend the analysis to low

shipment

- volume product classes. To determin e the cost to consumers of furnaces , central air

conditioners an d heat pumps , DOE estimated manufacturing costs, markups in the distribution chain, installation costs, and maintenance costs. E fficiency levels (both AFUE and standby and off mode levels) for furnaces included in this rulemaking were calculated according to the applicable sections of DOE test procedure, 10 CFR Part 430, subpart B, Appendix N, Uniform Test Method for Measuring the E nergy Consumption of Furnaces and Boilers . SEER efficiency

levels for central air conditioners and he at pumps were calculated according to 10 CFR Part 430, subpart B, Appendix M, Uniform Test Method for Measuring the Energy Consumption of Central Air Conditioners and Heat Pumps , and off mode energy consumption was calculated according to the proposals in the March 2011 supplemental notice of proposed rulemaking (SNOPR) which proposes amendments to DOE’s test procedures for central air conditioners and heat pumps to account for standby and off mode power consumption

In the engineering analysis pertaining to residential furnaces and central air conditioners and heat pumps , DOE evaluate d a range of product efficiency levels and associated manufacturing costs. The purpose of the analysis is to estimate the incremental increase to

sel l ing prices that would re sult from increasing efficiency levels above the baseline model in each product class. The engineering analysis considers technologies not eliminated in the screening analysis. The LCC analysis uses the cost

- efficiency relationships developed in the engine ering analysis.

2.6.1 Baseline Models

In order to analyze design options for energy efficiency improvements, DOE defined a baseline model unit for each product class. DOE defined baseline models as appliances with the most popular and cost

- effective features that just meet the current minimum efficiency standard. For standby and off mode, the baseline model was the model with the highest standby and off mode power consumption. In its selection process, DOE considered technical descriptions of the covered equi pment, definitions of the product classes as described in the framework document, results of the market assessment, and suggestions from stakeholders.

2.6.2 Manufacturing Cost Analysis

There are several ways to develop the relationship between cost and performa nce. DOE chose to use a component

- based engineering analysis, or teardown analysis. This approach identifies potential technological paths manufacturers could use to achieve increased equipment energy efficiency. DOE purchased “off

- the

- shelf” units commerc ially available on the market

and dismantled them component

- by

- component to determine what technologies and designs manufacturers currently employ to increase energy efficiency. DOE then used independent costing methods, along with manufacturer and component

- supplier data, to estimate the costs of the components.

DOE determined the efficiency levels corresponding to various design options from commercially available information on p roducts, data su bmitted by manufacturers, engineering2

- 10 calculations , and/or product testing

. DOE obtained cost estimates from detailed incremental manufacturer cost data, which include the cost of the equipment components, labor, purchased parts and materia ls, shipping/packaging, and investment. DOE estimated manufacturing costs using a combination of teardown analysis, manufacturer

- supplied estimates, and direct

estimates. See chapter 5 for details on DOE’s engineering analysis.

2.7 MARKUPS ANALYSIS

To carry ou t the engineering and life

- cycle cost (LCC) analyses, DOE needed to

determine the cost to the consumer of a baseline model furnace and the cost of more

- efficient units. The customer price of such units is not generally known. By applying a multiplier

, refe rred

to as a “markup

, ” to the manufacturers’ costs estimated in the engineering analysis, DOE

estimated the consu mers’ prices for the baseline model and more

- efficient equipment. In addition to estimating average markups, DOE characterized the markups with probability distributions

, which it used in the LCC analysis.

To develop markups, DOE identif ied how the products are distributed from the

manufacturer to the c onsu mer (the distribution channels). After establishing appropriate

distribution channels for each product

, DOE used economic data from the U.S. Census Bureau, HARDI, ACCA, and other sources to define how prices are marked up as the products pass from

manufacturers to customers. See Chapter 6 for details on the development of markups.

2.8 ENERGY USE A NALYSIS

The energy use analysis assesses the energy savings potential from adopting higher efficiency standards. The analysis provides the basis for the energy savings values DOE uses in the LCC and subsequent analyses. DOE estimate d the annual energy con sumption of residential furnaces and central air conditioners and heat pumps at specified energy efficiency levels for a representative set of users of these products

. DOE considered energy use for both residential and commercial users of these products.

DOE used data from the 2005 Residential Energy Consumption Survey (RECS) produced by the Energy Information Administration (EIA)

, the most recent survey available, to estimate the energy use of the covered products . DOE used 30 years of state weather dat a statistics from

the National Climatic Data Center to weather

- normalize the 2005 RECS cooling and heating energy use in selected household records to represent long

- term average cooling and heating

energy. RECS survey data provide information on the age of the products, as well as associated energy use in residential housing units in the United States.

As part of the analysis , DOE made certain assessments about product application, including how the products are operated and under what conditions. Th e se assessments, along with the methods used, are documented in chapter 7 of the TSD.

2.9 LIFE

- CYCLE COST AND PAYBA CK PERIOD ANALYSES2

- 11 In determining whether an energy efficiency standard is economically justified, EPCA directs DOE to consider the economic impact of potential standards on customers. The effect of amended standards on individual customers usually includes a reduction in o perating cost and an increase in purchase cost. DOE used the following two metrics to measure consumer impact s :

**•** LCC (life

- cycle cost) is the total customer cost of an appliance or product, generally over the life of the appliance or product, including purc hase and operating costs. The latter consist of maintenance, repair, and energy costs. Future operating costs are discounted to the time of purchase and summed over the lifetime of the appliance or product.

**•** PBP (payback period) measures the amount of time it takes customers to recover the assumed higher purchase price of a more energy

- efficient product through reduced operating costs.

DOE evaluated the net LCC to analyze the net effect of amended residential furnaces and central air conditioner and heat pum p standards on consumers. DOE used the cost

- efficiency relationship derived from the engineering analysis along with the energy costs derived from the energy use characterization. Inputs to the LCC calculation include the installed consumer cost of a produ ct (consumer purchase price plus installation cost), operating expenses (energy, repair, and maintenance costs), the lifetime of the unit, and a discount rate.

Because the installed cost of a product typically increases while operating cost typically

decre ases in response to amended standards, there is a time in the life of products with higher

than

- baseline efficiency when the net reduction in operating costs (in dollars) since the time of purchase is equal to the increase in the purchase price of the high er efficiency product. The length of time required for products to reach this cost

- equivalence point is known as the PBP.

DOE conducted the LCC and PBP analyses using typical values to reflect energy consumption in the field. DOE identified several input v alues for estimating the LCC, including retail prices; electricity prices; discount rate; maintenance, repair, and installation costs; and product lifetimes. DOE generated LCC and PBP results as probability distributions using a

simulation based on Monte Carlo analysis methods in which certain key inputs consist of probability distributions rather than single

- point values. Therefore, the outcomes can be expressed as probability distributions. As a result, the Monte Carlo analysis produces a range of

LCC an d PBP results. A distinct advantage of this type of approach is that DOE can identify the percentage of customers achieving LCC savings or attaining certain PBP values ; the approach

also allows the DOE to identify the average LCC savings or average PBP for a particular efficiency level.

DOE developed discount rates from estimates of the finance cost appli cable to product purchases. Following accepted principles of financial theory, the finance cost of raising funds to purchase such products can be interpre ted as either (1) the financial cost of any debt incurred to purchase products (interest charges on debt) or (2) the opportunity cost of any equity used to purchase products (interest earnings on household or business equity).

The electricity cost savings comprise the benefit side of the cost

- benefit analysis used to estimate the LCC impacts of more efficient central air conditioners and heat pumps. To value the electricity cost savings, DOE developed marginal electricity prices. The marginal electricity2

- 12 pr ice for a given consumer is the cost of the next increment of electricity use on their utility bill and is the correct estimate of the value of savings that a consumer would see in the real world.

An important feature of the LCC and PBP analyses is that i t has been conducted at both the regional and national levels. Aside from energy use, other important factors influencing the analyses include energy prices, installation costs, product distribution markups, and sales tax. At the national and regional leve ls, the LCC spreadsheets explicitly model the uncertainty and variability in the model’s inputs using probability distributions based on the shipment of products to different regions of the country.

2.10 SHIPMENTS ANALYSIS

DOE uses forecasts of product shipmen ts to calculate the national impacts of standards on energy use, NPV, and future manufacturer cash flows. DOE developed shipment forecasts based on an analysis of key market drivers for each considered product. In DOE’s shipments model, shipments of produc ts are driven by new construction, replacement of the existing stock of installed products, and existing households or buildings that do not already own the product. For furnaces, the shipments forecast produces the total number of furnaces of all fuel ty pes purchased in a year and the market shares by product class For central air conditioners and heat pumps, DOE accounted for shipments to commercial buildings as well as residential households.

The shipments model takes an accounting approach by tracking market shares of each product class and the vintage of units in the existing stock. Stock accounting uses product shipments as inputs to estimate the age distribution of in

- service product stocks for all years. The age distribution of in

- service product stocks is a key input to NES and NPV calculations because operating costs for any year depend on the age distribution of the stock. DOE used historical product shipments to assist in calibrating the shipments model. DOE also relied on historical regional product stock saturation data from past RECS surveys as well as past U.S. Census Bureau American Housing Surveys (AHS).

Chapter 9 of the TSD provides additional details on the shipments analysis and the impact that the considered standards ma y have on product shipments.

2.11 NATIONAL IMPACT ANAL YSIS

The NIA assesses the NES and the NPV from a national perspective of total consumer costs and savings expected to result from standards at specific efficiency levels. DOE determined the NPV

and NES for the standard levels considered for the product classes analyzed. To make the analysis more accessible and transparent to all interested parties, DOE prepared a Microsoft Excel spreadsheet that uses typical values (as opposed to probability distributions) a s inputs. To assess the effect of input uncertainty on NES and NPV results, DOE has developed its spreadsheet model to conduct sensitivity analyses by running scenarios on specific input variables. DOE conducted its NIA to assess impacts for the specific r egions considered for central air conditioners and heat pumps and furnaces

.

2.11.1 Efficiency Scenarios and Trends2

- 13 Several of the inputs for determining NES and NPV depend on product efficiency. DOE developed efficiency trends for the base case without new stan dards and the standards case s

. These trends specify the average annual historical and forecasted shipments

- weighted product

efficiencies.

DOE use d a “roll

- up” efficiency scenario in developing its forecasts of efficiency trends

after standards take effec t. Under this scenario, all products that perform at levels below a prospective standard are moved, or rolled up, to the minimum performance level allowed under the standard. The distribution of products that meet the higher efficiency standard levels is

u naffected. Chapter 10 of the TSD details the approach DOE used to forecast product

efficiencies.

2.11.2 National Energy Savings Analysis

The inputs for determining the national energy savings for each product analyzed are: (1) annual energy consumption per unit; (2) shipments; (3) product /equipment stock; (4) national energy consumption; and (5) site

- to

- source conversion factors. DOE calculated the national energy consumption by multiplying the number of units (stock) of each product (by vintage or age) by the un it energy consumption (also by vintage). Vintage represents the age of the equipment. DOE calculated annual NES based on the difference in national energy consumption for the base case (without new efficiency standards) and for each higher efficiency stand ard. DOE estimated energy consumption and savings based on site energy and converted the electricity consumption and savings to source energy. Cumulative energy savings are the sum of the NES for each year over the timeframe of the analysis

.

2.11.3 Net Present Value Analysis

The inputs for determining NPV are: (1) total annual installed cost; (2) total annual savings in operating costs; (3) a discount factor; (4) present value of costs; and (5) present value of savings. DOE calculated net savings each year as th e difference between the base case and each standards case in total savings in operating costs and total increases in installed costs. DOE calculated savings over the life of each product, accounting for differences in annual energy

rates. DOE calculated N PV as the difference between the present value of operating cost savings and the present value of total installed costs. DOE used a discount factor based on real discount rates of 3 and 7 percent to discount future costs and savings to present values.

DO E calculated increases in total installed costs as the difference in total installed cost between the base case and standards case ( i.e. , once the standards take effect). Because the more efficient products bought in the standards case usually cost more th an products bought in the base case, cost increases appear as negative values in the NPV.

DOE expressed savings in operating costs as decreases associated with the lower energy consumption of products bought in the standards case compared to the base eff iciency case. Total savings in operating costs are the product of savings per unit and the number of units of each vintage that survive in a given year.

Chapter 10 of the TSD provides additional details on the national impacts analysis.2

- 14 2.12 CONSUMER SUBGROUP ANALYSIS

The consumer subgroup analysis evaluates economic impacts on selected consumers groups who might be adversely affected by a change in the national energy conservation standards for the considered products. DOE evaluates impacts on partic ular subgroups of consumers in part by analyzing the LCC impacts and PBP for those particular consumers. DOE

use d the LCC spreadsheet model to evaluate impacts on consumer subgroups. DOE can analyze the LCC for any subgroup by applying the LCC spreadsheet model to only that subgroup. DOE is particularly sensitive to increases in the consumer price of the considered products, wishing to avoid a negative economic impact on any identified consumer subgroup.

Where data permitted, DOE conduct ed a regional cons umer subgroup analysis that sampled particular subgroups to determine the potential for the considered standards to disproportionately affect them.

2.13 MANUFACTURER IMPACT ANALYSIS

DOE performed a n MIA to estimate the financial impact of higher energy conser vation

standards on residential furnace and central air conditioner and heat pump manufacturers, as well

as to calculate the impact of such standards on employment and manufacturing capacity. The MIA has both quantitative and qualitative aspects. The quantitative part of the MIA relies on the government regulatory impact model (GRIM), an industry

- cash

- flow model customized for these three industries. The GRIM inputs are information on the industry cost structure, shipments, and

revenues. This includes information from many of the analyses described above, such as manufacturing costs and prices from the engineering analysis and shipments forecasts from the shipments analysis . The key GRIM output is the industry net present value (INPV). Different

sets of assumptions (scenarios) will produce different results. The qualitative part of the MIA addresses factors such as product characteristics, characteristics of particular firms, and market and product trends, and includes assessment of the impacts of standa rds on manufacturer subgroups.

DOE conducts each MIA in three phases

. In Phase I, DOE creates an industry profile to characterize the industry and identify important issues that require consideration. In Phase II, DOE prepares an industry cash

- flow mode l and interview questionnaire to guide subsequent discussions. In Phase III, DOE interviews manufacturers and assesses the impacts of standards quantitatively and qualitatively. DOE assesses industry and subgroup cash flow and NPV using

the GRIM. DOE then assesses impacts on competition, manufacturing capacity, employment, and regulatory burden based on manufacturer interview feedback and discussions. Chapter 12 of the TSD describes the complete MIA.

2.14 UTILITY IMPACT ANALY SIS

The utility impact analysis inclu des an analysis of selected effect s of new energy conservation standards on the electric and the gas utility industries. For this analysis, DOE adapted National Energy Modeling System (NEMS), a large multi

- sectoral, partial

- equilibrium2

- 15 model of the U.S. en ergy sector that the EIA developed throughout the past decade primarily for preparing EIA’s AEO. In previous rulemakings, a variant of NEMS (currently termed NEMS

BT, BT referring to DOE’s Building Technologies P rogram) was developed to address the specifi c impacts of an energy conservation standard.

Available in the public domain, NEMS produces a widely recognized baseline energy forecast for the United States through 2030. The typical NEMS outputs include forecasts of electricity sales, prices, and elect ric generating capacity. DOE conducts the utility impact analysis as a scenario that departs from the latest AEO reference case. In other words, the energy savings impacts from amended energy conservation standards are modeled using NEMS

- BT to generate for ecasts that deviate from the AEO reference case.

2.15 EMPLOYMENT IMPACT AN ALYSIS

The imposition of standards can affect employment both directly and indirectly. Direct employment impacts are changes in the number of employees at plants that produce the covered products and at the affiliated distribution and service companies. DOE evaluated direct employment impacts in the manufacturer impact analysis. Indirect employment impacts may result from consumers shifting expenditures between goods (the substitution eff ect) and from changes in income and overall expenditure levels (the income effect). DOE use d PNNL’s impact of sector energy technologies (ImSET) model to investigate the combined direct and indirect employment impacts. The ImSET model, which was developed for DOE’s Office of Planning, Budget, and Analysis, estimates the employment and income effects energy

- saving technologies produce in buildings, industry, and transportation. Compared with simple economic multiplier approaches, ImSET allows for more comple te and automated analysis of the economic impacts of energy conservation investments.

2.16 ENVIRONMENTAL ASSESSMENT

Pursuant to the National Environmental Policy Act of 1969 and the requirements of 42 U.S.C. 6295(o)(2)(B)(i) (VI) and 6316(a), DOE prepare d an environmental assessment of the impacts of amended energy conservation standards for residential furnaces and central air conditioners and heat pumps

. The primary environmental effects of these standards would be reduced power plant emissions resulting fro m reduced consumption of electricity. DOE assess ed these environmental effects by using NEMS

- BT to provide key inputs to its analysis. The portion of the environmental assessment produced by NEMS

- BT considers carbon dioxide (CO 2 ), nitrogen oxides (NO X ), an d mercury (Hg). The environmental assessment also considers impacts

on SO 2

2.16.1 Carbon Dioxide emissions

. After a brief discussion of general methodology, this section will address each

of the relevant emissions

. Th e following section then explains how DOE plans to monetize t he

benefits associated with emissions reductions.

In the absence of any Federal regulation of power plant emissions of CO 2 , a DOE standard is likely to result in reductions of these emissions

. The CO 2 emission reductions likely

to result fro m a standard was estimated using NEMS

- BT and national energy savings estimates drawn from the NIA spreadsheet model. The net benefit of the standard is the difference between2

- 16 emissions estimated by NEMS

- BT at each standard level considered and the AEO Refe rence Case. NEMS

- BT tracks CO 2

2.16.2 Sulfur Dioxide emissions using a detailed module that provides results with broad coverage of all sectors and inclusion of interactive effects.

SO 2 emissions from affected electric generating units (EGUs) are subject to nat ionwide and regional emissions cap and trading programs, and DOE has preliminarily determined that these programs create uncertainty about the potential standards’ impact on SO 2 emissions. Title IV of the Clean Air Act sets an annual emissions cap on SO 2 f or affected EGUs in the 48 contiguous states and the District of Columbia (D.C.). SO 2 emissions from 28 eastern states and D.C. are also limited under the Clean Air Interstate Rule (CAIR, 70 Fed. Reg. 25162 (May 12, 2005)), which created an allowance

- based trading program. Although CAIR has been remanded to EPA by the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit), see

North Carolina v. EPA , 550 F.3d 1176 (D.C. Cir. 2008), it remains in effect temporarily, consistent with the D.C. Circuit’s earlier opinion in North Carolina v. EPA , 531 F.3d 896 (D.C. Cir. 2008). On July 6, 2010, EPA issued the Transport Rule proposal, a replacement for CAIR

, which would limit emissions from EGUs in 32 states, potentially through the interstate trading of allowances, among other options. 75 FR 45210 (Aug. 2, 2010).

The attainment of emissions caps is typically flexible among EGUs and is enforced through the use of emissions allowances and tradable permits. Under existing EPA regulations, and under the Transport Rule if it is finalized, any excess SO 2 emissions allowances resulting from the lower electricity demand caused by the imposition of an efficiency st andard could be used to permit offsetting increases in SO 2 emissions by any regulated EGU. However, if the standard resulted in a permanent increase in the quantity of unused emissions allowances, there

would be an overall reduction in SO 2 emissions from t he standards. While there remains some uncertainty about the ultimate effects of efficiency standards on SO 2 emissions covered by the existing cap and trade system, the NEMS

- BT modeling system that DOE uses to forecast emissions reductions currently indica tes that no physical reductions in power sector emissions

would occur for SO 2.

2.16.3 Nitrogen Oxides

A cap on NO

x emissions, affecting electric generating units in the CAIR region, would

mean that the amended central air conditioner, heat pump, and furnace stan dards may have little or no physical effect on NO

x emissions in the 28 eastern states and the D.C. covered by CAIR or any states covered by the proposed Transport Rule if the Transport Rule if finalized. The standards would, however, reduce NO

x

2.16.4 Mercury emissions i n those 22 states not affected by the CAIR. As a result, DOE use d NEMS

- BT to estimate the emissions reductions from possible standards in the 22 States where emissions are not capped.

Similar to emissions of SO 2 and NO X , future emissions of Hg wou ld have been subject to emissions caps

. In May 2005, EPA issued the Clean Air Mercury Rule (CAMR). 70 FR 28606 (May 18, 2005). CAMR would have permanently capped emissions of mercury for new and2

- 17 existing coal

- fired power plants in all States by 2010. Howev er, on February 8, 2008, the DC

Circuit issued its decision in New Jersey v. Environmental Protection Agency , in which it vacated CAMR. 517 F.3d 574 (DC Cir. 2008)

. EPA has decided to develop emissions standards for power plants under the Clean Air Act (Se ction 112), consistent with the DC Circuit’s opinion

on the CAMR

. See http://www.epa.gov/air/mercuryrule/pdfs/certpetition_withdrawal.pdf

. Pending EPA's forthcoming revisions to the rule, DOE is excluding the CAMR from its

e nvironmental assessment

. In the absence of CAMR, a DOE standard would likely reduce Hg

emissions and DOE use d NEMS

- BT to estimate these emission reductions. However, DOE continues to review the impact of rules that reduce energy consumption on Hg emissions, and may revise its assessment of Hg emission reductions in future rulemakings.

2.16.5 Particulate Matter

DOE acknowledges that particulate matter (PM) exposure can impact huma n health. Power plant emissions can have either direct or indirect impacts on PM. A portion of the pollutants emitted by a power plant are in the form of particulates as they leave the smoke stack. These are direct, or primary, PM emissions. However, the g reat majority of PM emissions associated with power plants are in the form of secondary sulfates, which are produced at a significant distance from power plants by complex atmospheric chemical reactions that often involve the gaseous (non

- particulate) emis sions of power plants, mainly SO 2 and NO

x . The quantity of the secondary sulfates produced is determined by a very complex set of factors including the atmospheric quantities of SO 2 and NO

x , and other atmospheric constituents and

conditions. Because these highly complex chemical reactions produce PM comprised of different constituents from different sources, EPA does not distinguish direct PM emissions from power plants from the secondary sulfate particulates in its ambient air quality requirements, PM

moni toring of ambient air quality, or PM emissions inventories. For these reasons, it is not currently possible to determine how the amended standard impacts either direct or indirect PM emissions. Therefore, DOE did not assess the impact of these standards on PM emissions. Further, as described previously, it is uncertain whether efficiency standards will result in a net decrease in power plant emissions of SO 2 , which are now largely regulated by cap and trade
systems.

2.17 MONETIZATION OF EMIS SIONS REDUCTION BEN EFITS

DOE plans to consider the estimated monetary benefits likely to result from the reduced

emissions of CO 2 and other pollutants that are expected to result from each of the standard levels

considered.

In order to estimate the monetary value of be nefits resulting from reduced emissions of

CO 2 emissions, DOE use d in its analysis the most current Social Cost of Carbon (SCC) values developed and/or agreed to by interagency reviews

. The SCC is intended to be a monetary measure of the incremental damage resulting from greenhouse gas (GHG) emissions, including, but not limited to, net agricultural productivity loss, human health effects, property damage from sea level rise, and changes in ecosystem services. Any effort to quantify and to monetize the

harm s associated with climate change will raise serious questions of science, economics, and2

- 18 ethics. But with full regard for the limits of both quantification and monetization, the SCC can be used to provide estimates of the social benefits of reductions in G HG emissions.

At the time of this notice, the most recent interagency estimates of the potential global benefits resulting from reduced CO 2 emissions in 2010, expressed in 2009$, were $4.9, $22.1, $36.3, and $67.1 per metric ton avoided. For emission reductions that occur in later years, these values grow in real terms over time. Additionally, the interagency group determined that a range

of values from 7 percent to 23 percent should be used to adjust the global SCC to calculate domestic effects, although DOE will give preference to consideration of the global benefits of reducing CO 2 emissions. To calculate a present value of the stream of mo netary values, DOE will discount the values in each of the four cases using the discount rates that had been used to

obtain the SCC values in each case.

DOE recognizes that scientific and economic knowledge continues to evolve rapidly as to

the contributi on of CO 2 and other GHG to changes in the future global climate and the potential resulting damages to the world economy. Thus, these values are subject to change.

DOE also estimated the potential monetary benefit of reduced NO X , and Hg emissions

result ing from the standard levels it considers. For NO X emissions, available estimates suggest a very wide range of monetary values for NO X emissions, ranging from $370 per ton to $3,800 per

ton of NO X from stationary sources, measured in 2001$ (equivalent to a range of $447 to $4,591 per ton in 2009$). a In accordance with U.S. Office of Management and Budget (OMB) guidance, DOE will conduct two calculations of the monetary benefits derived using each of the economic

values used for NO

x , one using a real discoun t rate of 3 percent and another using a real discount rate of 7 percent. b

DOE d id not monetize estimates of Hg reduction in this rulemaking. DOE is aware of multiple agency efforts to determine the appropriate range of values used in evaluating the
poten tial economic benefits of reduced Hg emissions. DOE has decided to await further guidance regarding consistent valuation and reporting of Hg emissions before it once again monetizes Hg in its rulemakings.

2.18 REGULATORY IMPACT AN ALYSIS

In the direct final rul e , DOE prepared a n RIA pursuant to Executive Order 12866, Regulatory Planning and Review, 58 FR 51735, October 4, 1993. The RIA is subject to review under the Executive Order by the Office of Information and Regulatory Affairs at the Office of Management and Budget. The RIA addresses the potential for non

- regulatory approaches to supplant or augment energy conservation standards in order to improve the energy efficiency or reduce the energy consumption of the products covered under this rulemaking.

a F or additional information , refer to U.S. Office of Management and Budget , Office of Information and Regulatory Affairs, 2006 Report to Congress on the Costs and Benefits of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities , Washington, DC

. b OMB, Circular A

- 4: Regulatory Analysis ( Sept. 17, 2003).2

- 19 DOE recognizes that non

- r egulatory efforts by manufacturers, utilities, and other interested parties can substantially affect energy efficiency or reduce energy consumption. DOE not only base d its assessment on the actual impacts of any such initiatives to date, but also

consider e d information presented by interested parties on the impacts existing initiatives might

have in the f uture

.

2.19 REGIONAL STANDARDS I MPACT ANALYSIS

In establishing a framework for regional standards, EISA 2007 appears to recognize that

DOE has not dealt with th ese issues previously, as the appliance standards programs historically set only national standards, and states that DOE shall consider the impact of additional regional standards on consumers, manufacturers, and other market participants, including produc t distributors, dealers, contractors, and installers.

DOE addresses impacts on consu mers in chapter 8 and chapter 11 of the TSD. DOE analyzed the impacts of regional standards on consumers within these chapters by calculating consumer LCCs and subgroup LCC s on a regional basis. For the direct final rule , DOE analyzed the impacts of regional standards on manufacturers as part of the manufacturer impact analysis (chapter 12 of the TSD). DOE develop ed a new regional standards impacts analysis a s a separate
TSD chapter that identifies specific impacts of concern and examines the significance and scale of these impacts on the affected parties. See chapter 18 of the TSD for an assessment of the impacts of regional standards on market participants other than manufa cturers and consumers.