CHAPTER 13. MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

13.1 INTRODUCTION ......................................................................................................... 13­1

13.2 METHODOLOGY ........................................................................................................ 13­1

13.2.1 Phase I: Industry Profile.................................................................................... 13­2

13.2.2 Phase II: Industry Cash­Flow Analysis and Interview Guide........................... 13­2

13.2.2.1 Industry Cash­Flow Analysis............................................................... 13­2

13.2.2.2 Interview Guide ................................................................................... 13­3

13.2.3 Phase III: Sub­Group Analysis ......................................................................... 13­3

13.2.3.1 Manufacturer Interviews...................................................................... 13­3

13.2.3.2 Revised Industry Cash­Flow Analysis................................................. 13­4

13.2.3.3 Manufacturer Sub­Group Analysis...................................................... 13­4

13.2.3.4 Small­Business Manufacturer Subgroup ............................................. 13­4

13.2.3.5 Competitive Impact Assessment.......................................................... 13­5

13.2.3.6 Manufacturing Capacity Impact .......................................................... 13­5

13.2.3.7 Employment Impact............................................................................. 13­5

13.2.3.8 Cumulative Regulatory Burden ........................................................... 13­6

13.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES.......................................... 13­6

13.3.1 R­410A............................................................................................................... 13­6

13.3.2 Equipment Classes Definitions.......................................................................... 13­7

13.3.3 ENERGY STAR Program ................................................................................. 13­8

13.3.4 Timing................................................................................................................ 13­9

13.4 GRIM INPUTS AND ASSUMPTIONS...................................................................... 13­10

13.4.1 Overview of the GRIM .................................................................................... 13­10

13.4.2 Sources GRIM Inputs ...................................................................................... 13­11

13.4.2.1 Corporate Annual Reports ................................................................. 13­11

13.4.2.2 Standard and Poor Credit Ratings...................................................... 13­11

13.4.2.3 Shipment Model................................................................................. 13­11

13.4.2.4 Engineering Analysis......................................................................... 13­12

13.4.2.5 Manufacturer Interviews.................................................................... 13­12

13.4.3 Financial Parameters........................................................................................ 13­12

13.4.4 Corporate Discount Rate.................................................................................. 13­13

13.4.5 Trial Standard Levels....................................................................................... 13­15

13.4.6 NES­Shipments Forecast ................................................................................. 13­16

13.4.7 R­410A­Shipments Forecast............................................................................ 13­18

13.4.7.1 R­410A Base Case ............................................................................. 13­18

13.4.7.2 Standards Case................................................................................... 13­20

13.4.8 Production Costs.............................................................................................. 13­23

13.4.9 Conversion Costs............................................................................................. 13­27

13.4.9.1 Conversion Capital Expenditures ...................................................... 13­28

13.4.9.2 R­410A Conversion ........................................................................... 13­28

13.4.9.3 Energy Conservation Standards......................................................... 13­29

13.4.9.4 Equipment Conversion Expenses ...................................................... 13­30

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EERE-2007-BT-STD-0012 COMMENT 02
13.4.9.5 R­410A Conversion ........................................................................... 13­30

13.4.9.6 Energy Conservation Standards......................................................... 13­31

13.4.10 Markups ................................................................................................... 13­32

13.4.10.1 Full Cost Recovery Markup............................................................. 13­33

13.4.10.2 Partial Cost Recovery Markup......................................................... 13­33

13.5 MANUFACTURING IMPACTS TO THE BASE CASE AS A RESULT OF THE

REFRIGERANT PHASEOUT................................................................................................ 13­34

13.5.1 PTAC and PTHP Industry Financial Impacts as a result of the Refrigerant

Phaseout on the Base Case........................................................................................... 13­37

13.6 ENERGY CONSERVATION STANDARD IMPACT SCENARIOS ....................... 13­38

13.6.1 Markup Scenarios ............................................................................................ 13­38

13.6.1.1 R­410A Base Case With Full Cost Recovery and Amended Energy

Conservation Standards With Full Cost Recovery .......................................... 13­39

13.6.1.2 R­410A Base Case With 50­Percent Cost Recovery and Amended

Energy Conservation Standards With Full Cost Recovery.............................. 13­39

13.6.1.3 R­410A Base Case With Full Cost Recovery and Amended Energy

Conservation Standards With 50­Percent Cost Recovery ............................... 13­42

13.6.1.4 R­410A Base Case With 50­Percent Cost Recovery and Amended

Energy Conservation Standards With 50­Percent Cost Recovery................... 13­44

13.7 STANDARD SIZE PTAC AND PTHP INDUSTRY FINANCIAL IMPACTS ........ 13­47

13.7.1 Impacts on Industry Net Present Value ........................................................... 13­47

13.7.2 Impacts on Annual Cash Flow......................................................................... 13­50

13.8 NON­STANDARD SIZE PTAC AND PTHP INDUSTRY FINANCIAL IMPACTS... 13­

52

13.8.1 Impacts on Industry Net Present Value ........................................................... 13­53

13.8.2 Impacts on Annual Cash Flow......................................................................... 13­55

13.9 OTHER IMPACTS...................................................................................................... 13­58

13.9.1 Employment..................................................................................................... 13­58

13.9.2 Manufacturing Capacity................................................................................... 13­59

13.9.3 Cumulative Regulatory Burden ....................................................................... 13­59

13.9.3.1 Federal Regulations on PTACs and PTHPs and Other Equipment

Produced by the Same Manufacturers ............................................................. 13­60

13.9.3.2 Restriction of Hazardous Substances Directive................................. 13­60

13.10 CONCLUSIONS.......................................................................................................... 13­61

13.10.1.1 Standard Size PTAC and PTHP Industry ........................................ 13­61

13.10.1.2 Non­Standard Size PTAC and PTHP Industry ................................ 13­64

LIST OF TABLES

Table 13.4.1 GRIM Financial Parameters Based on 2002­2006 Weighted Company Financial

Data.......................................................................................................................................... 13­13

Table 13.4.2 Cost of Equity Calculation................................................................................. 13­14

Table 13.4.3 Cost of Debt Calculation.................................................................................... 13­15

Table 13.4.4 Standard Size and Non­Standard Size PTACs and PTHPs Baseline Efficiency

Levels and TSLs ...................................................................................................................... 13­16

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EERE-2007-BT-STD-0012 COMMENT 02
Table 13.4.5 Total NES­Shipments Forecast in 2012............................................................. 13­16

Table 13.4.6 Base Case Distribution of Efficiencies for Standard Size PTAC Shipments with a

Cooling Capacity of 9,000 Btu/h in 2012 Estimated in the NES............................................. 13­17

Table 13.4.7 Base Case Distribution of Efficiencies for Standard Size PTHP Shipments with a

Cooling Capacity of 9,000 Btu/h in 2012 Estimated in the NES............................................. 13­17

Table 13.4.8 Base Case Distribution of Efficiencies for Standard Size PTAC Shipments with a

Cooling Capacity of 12,000 Btu/h in 2012 Estimated in the NES........................................... 13­17

Table 13.4.9 Base Case Distribution of Efficiencies for Standard Size PTHP Shipments with a

Cooling Capacity of 12,000 Btu/h in 2012 Estimated in the NES........................................... 13­17

Table 13.4.10 Base Case Distribution of Efficiencies for Non­Standard Size PTAC Shipments

with a Cooling Capacity of 11,000 Btu/h in 2012 Estimated in the NES................................ 13­17

Table 13.4.11 Base Case Distribution of Efficiencies for Non­Standard Size PTHP Shipments

with a Cooling Capacity of 11,000 Btu/h in 2012 Estimated in the NES................................ 13­17

Table 13.4.12 Estimated System Performance Degradation by Equipment Class................. 13­19

Table 13.4.13 R­410A Base Case Distribution of Efficiencies for Standard Size PTAC

Shipments with a Cooling Capacity of 9,000 Btu/h in 2010 ................................................... 13­19

Table 13.4.14 R­410A Base Case Distribution of Efficiencies for Standard Size PTHP

Shipments with a Cooling Capacity of 9,000 Btu/h in 2010 ................................................... 13­19

Table 13.4.15 R­410A Base Case Distribution of Efficiencies for Standard Size PTAC

Shipments with a Cooling Capacity of 12,000 Btu/h in 2010 ................................................. 13­19

Table 13.4.16 R­410A Base Case Distribution of Efficiencies for Standard Size PTHP

Shipments with a Cooling Capacity of 12,000 Btu/h in 2010 ................................................. 13­20

Table 13.4.17 R­410A Base Case Distribution of Efficiencies for Non­Standard Size PTAC

Shipments with a 11,000 Btu/h Cooling Capacity in 2010...................................................... 13­20

Table 13.4.18 R­410A Base Case Distribution of Efficiencies for Non­Standard Size PTHP

Shipments with a 11,000 Btu/h Cooling Capacity in 2010...................................................... 13­20

Table 13.4.19 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Standard Size PTACs with a Cooling Capacity of 9,000 Btu/h in 2012 – Rollup

Scenario.................................................................................................................................... 13­21

Table 13.4.20 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Standard Size PTHPs with a Cooling Capacity of 9,000 Btu/h in 2012 – Rollup

Scenario.................................................................................................................................... 13­21

Table 13.4.21 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Standard Size PTACs with a Cooling Capacity of 12,000 Btu/h in 2012 – Rollup

Scenario.................................................................................................................................... 13­21

Table 13.4.22 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Standard Size PTHPs with a Cooling Capacity of 12,000 Btu/h in 2012 – Rollup

Scenario.................................................................................................................................... 13­22

Table 13.4.23 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Non­Standard Size PTACs with a 11,000 Btu/h Cooling Capacity in 2012 –

Rollup Scenario........................................................................................................................ 13­22

Table 13.4.24 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Non­Standard Size PTHPs with a 11,000 Btu/h Cooling Capacity in 2012 –

Rollup Scenario........................................................................................................................ 13­23

Table 13.4.25 Base Case Production Costs (2006$) used in the GRIM for R­22 Standard Size

PTAC 9,000 Btu/h Cooling Capacity ...................................................................................... 13­24

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EERE-2007-BT-STD-0012 COMMENT 02
Table 13.4.26 Base Case Production Costs (2006$) used in the GRIM for R­22 Standard Size

PTHP 9,000 Btu/h Cooling Capacity....................................................................................... 13­24

Table 13.4.27 Base Case Production Costs (2006$) used in the GRIM for R­22 Standard Size

PTAC 12,000 Btu/h Cooling Capacity .................................................................................... 13­24

Table 13.4.28 Base Case Production Costs (2006$) used in the GRIM for R­22 Standard Size

PTHP 12,000 Btu/h Cooling Capacity..................................................................................... 13­25

Table 13.4.29 Base Case Production Costs (2006$) used in the GRIM for R­22 Non­Standard

Size PTAC 11,000 Btu/h Cooling Capacity ............................................................................ 13­25

Table 13.4.30 Base Case Production Costs (2006$) used in the GRIM for R­22 Non­Standard

Size PTHP 11,000 Btu/h Cooling Capacity............................................................................. 13­25

Table 13.4.31 Base Case Production Costs (2006$) used in the GRIM for R­410A Standard Size

PTAC 9,000 Btu/h Cooling Capacity ...................................................................................... 13­26

Table 13.4.32 Base Case Production Costs (2006$) used in the GRIM for R­410A Standard Size

PTHP 9,000 Btu/h Cooling Capacity....................................................................................... 13­26

Table 13.4.33 Base Case Production Costs (2006$) used in the GRIM for R­410A Standard Size

PTAC 12,000 Btu/h Cooling Capacity .................................................................................... 13­26

Table 13.4.34 Base Case Production Costs (2006$) used in the GRIM for R­410A Standard Size

PTHP 12,000 Btu/h Cooling Capacity..................................................................................... 13­27

Table 13.4.35 Base Case Production Costs (2006$) used in the GRIM for R­410A Non­Standard

Size PTAC 11,000 Btu/h Cooling Capacity ............................................................................ 13­27

Table 13.4.36 Base Case Production Costs (2006$) used in the GRIM for R­410A Non­Standard

Size PTHP 11,000 Btu/h Cooling Capacity............................................................................. 13­27

Table 13.4.37 Conversion Capital Expenditure for Standard Size PTACs and PTHPs by TSL 13­

30

Table 13.4.38 Conversion Capital Expenditure for Non­Standard PTACs and PTHPs by TSL 13­

30

Table 13.4.39 Equipment Conversion Expenses for Standard Size PTACs and PTHPs by TSL

.................................................................................................................................................. 13­32

Table 13.4.40 Equipment Conversion Expenses for Non­Standard PTACs and PTHPs by TSL

.................................................................................................................................................. 13­32

Table 13.5.1 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for Standard

Size PTAC with a 9,000 Btu/h Cooling Capacity.................................................................... 13­35

Table 13.5.2 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for Standard

Size PTHP with a 9,000 Btu/h Cooling Capacity.................................................................... 13­35

Table 13.5.3 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for Standard

Size PTAC with a 12,000 Btu/h Cooling Capacity.................................................................. 13­36

Table 13.5.4 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for Standard

Size PTHP with a 12,000 Btu/h Cooling Capacity.................................................................. 13­36

Table 13.5.5 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for NonStandard Size PTAC with a 11,000 Btu/h Cooling Capacity .................................................. 13­36

Table 13.5.6 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for NonStandard Size PTHP with a 11,000 Btu/h Cooling Capacity................................................... 13­37

Table 13.5.7 Changes in Base Case Industry Net Present Value from R­410A Conversion for

Standard Size PTACs and PTHPs............................................................................................ 13­37

Table 13.5.8 Changes in Base Case Industry Net Present Value from R­410A Conversion for

Non­Standard Size PTACs and PTHPs................................................................................... 13­38

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EERE-2007-BT-STD-0012 COMMENT 02
Table 13.6.1 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With Full Cost Recovery for Standard Size PTAC

with a 9,000 Btu/h Cooling Capacity....................................................................................... 13­39

Table 13.6.2 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With Full Cost Recovery for Standard Size PTHP with

a 9,000 Btu/h Cooling Capacity............................................................................................... 13­40

Table 13.6.3 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With Full Cost Recovery for Standard Size PTAC

with a 12,000 Btu/h Cooling Capacity..................................................................................... 13­40

Table 13.6.4 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With Full Cost Recovery for Standard Size PTHP with

a 12,000 Btu/h Cooling Capacity............................................................................................. 13­41

Table 13.6.5 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With Full Cost Recovery for Non­Standard Size

PTAC with a 11,000 Btu/h Cooling Capacity ......................................................................... 13­41

Table 13.6.6 13.6.7 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With Full Cost Recovery for Non­Standard Size

PTHP with a 11,000 Btu/h Cooling Capacity.......................................................................... 13­41

Table 13.6.8 Markups Reflecting the R­410A Base Case With Full Cost Recovery and Amended

Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size PTAC with a

9,000 Btu/h Cooling Capacity.................................................................................................. 13­42

Table 13.6.9 Markups Reflecting the R­410A Base Case With Full Cost Recovery and Amended

Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size PTHP with a

9,000 Btu/h Cooling Capacity.................................................................................................. 13­43

Table 13.6.10 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size

PTAC with a 12,000 Btu/h Cooling Capacity ......................................................................... 13­43

Table 13.6.11 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size

PTHP with a 12,000 Btu/h Cooling Capacity.......................................................................... 13­43

Table 13.6.12 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Non­Standard

Size PTAC with a 11,000 Btu/h Cooling Capacity.................................................................. 13­44

Table 13.6.13 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Non­Standard

Size PTHP with a 11,000 Btu/h Cooling Capacity.................................................................. 13­44

Table 13.6.14 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size

PTAC with a 9,000 Btu/h Cooling Capacity ........................................................................... 13­45

Table 13.6.15 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size

PTHP with a 9,000 Btu/h Cooling Capacity............................................................................ 13­45

Table 13.6.16 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size

PTAC with a 12,000 Btu/h Cooling Capacity ......................................................................... 13­46

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EERE-2007-BT-STD-0012 COMMENT 02
Table 13.6.17 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size

PTHP with a 12,000 Btu/h Cooling Capacity.......................................................................... 13­46

Table 13.6.18 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size

PTAC with a 11,000 Btu/h Cooling Capacity ......................................................................... 13­46

Table 13.6.19 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size

PTHP with a 11,000 Btu/h Cooling Capacity.......................................................................... 13­47

Table 13.7.1 Changes in Industry Net Present Value for Standard Size PTACs and PTHPs (R410A Base Case Full Cost Recovery With Amended Energy Conservation Standards Full Cost

Recovery)................................................................................................................................. 13­48

Table 13.7.2 Changes in Industry Net Present Value for Standard Size PTACs and PTHPs (R410A Base Case Full Cost Recovery With Ameneded Energy Conservation Standards 50­Percent

Cost Recovery)......................................................................................................................... 13­48

Table 13.7.3 Changes in Industry Net Present Value for Standard Size PTACs and PTHPs (R410A Base Case 50­Percent Cost Recovery With Ameneded Energy Conservation Standards Full

Cost Recovery)......................................................................................................................... 13­49

Table 13.7.4 Changes in Industry Net Present Value for Standard Size PTACs and PTHPs (R410A Base Case 50­Percent Cost Recovery With Ameneded Energy Conservation Standards 50­

Percent Cost Recovery)............................................................................................................ 13­49

Table 13.8.1 Changes in Industry Net Present Value for Non­Standard Size PTACs and PTHPs

(R­410A Base Case Full Cost Recovery With Amended Energy Conservation Standard Full Cost

Recovery)................................................................................................................................. 13­53

Table 13.8.2 Changes in Industry Net Present Value for Non­Standard Size PTACs and PTHPs

(R­410A Base Case Full Cost Recovery With Amended Energy Conservation Standard 50­

Percent Cost Recovery)............................................................................................................ 13­54

Table 13.8.3 Changes in Industry Net Present Value for Non­Standard Size PTACs and PTHPs

(R­410A Base Case 50­Percent Cost Recovery With Amended Energy Conservation Standard

Full Cost Recovery)................................................................................................................. 13­54

Table 13.8.4 Changes in Industry Net Present Value for Non­Standard Size PTACs and PTHPs

(R­410A Base Case 50­Percent Cost Recovery With Amended Energy Conservation Standard

50­Percent Cost Recovery) ...................................................................................................... 13­55

Table 13.9.1 Projected Change in Labor Expenditures, Standard Size PTAC and PTHP (2012)

.................................................................................................................................................. 13­58

Table 13.9.2 Projected Change in Labor Expenditures, Non­Standard Size PTAC and PTHP

(2012)....................................................................................................................................... 13­58

Table 13.9.3 Federal Regulation Timetables........................................................................... 13­60

LIST OF FIGURES

Figure 13.4.1 Using the GRIM to Calculate Cash Flow.......................................................... 13­10

Figure 13.7.1 Annual Net Cash Flows for Standard Size PTAC and PTHP Industry (R­410A

Base Case With Full Cost Recovery and Amended Energy Conservation Standards With Full

Cost Recovery)......................................................................................................................... 13­50

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EERE-2007-BT-STD-0012 COMMENT 02
Figure 13.7.2 Annual Net Cash Flows for Standard Size PTAC and PTHP Industry (R­410A

Base Case With Full Cost Recovery and Amended Energy Conservation Standards With 50­

Percent Cost Recovery)............................................................................................................ 13­51

Figure 13.7.3 Annual Net Cash Flows for Standard Size PTAC and PTHP Industry (R­410A

Base Case With 50­Percent Cost Recovery and Amended Energy Conservation Standards With

Full Cost Recovery)................................................................................................................. 13­51

Figure 13.7.4 Annual Net Cash Flows for Standard Size PTAC and PTHP Industry (R­410A

Base Case With 50­Percent Cost Recovery and Amended Energy Conservation Standards With

50­Percent Cost Recovery) ...................................................................................................... 13­52

Figure 13.8.1 Annual Net Cash Flows for Non­Standard Size PTAC and PTHP Industry (R410A Base Case With Full Cost Recovery and Amended Energy Conservation Standards With

Full Cost Recovery)................................................................................................................. 13­56

Figure 13.8.2 Annual Net Cash Flows for Non­Standard Size PTAC and PTHP Industry (R410A Base Case With Full Cost Recovery and Amended Energy Conservation Standards With

50­Percent Cost Recovery) ...................................................................................................... 13­56

Figure 13.8.3 Annual Net Cash Flows for Non­Standard Size PTAC and PTHP Industry (R410A Base Case With 50­Percent Cost Recovery and Amended Energy Conservation Standards

With Full Cost Recovery)........................................................................................................ 13­57

Figure 13.8.4 Annual Net Cash Flows for Non­Standard Size PTAC and PTHP Industry (R410A Base Case With 50­Percent Cost Recovery and Amended Energy Conservation Standards

With 50­Percent Cost Recovery) ............................................................................................. 13­57

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EERE-2007-BT-STD-0012 COMMENT 02
CHAPTER 13. MANUFACTURER IMPACT ANALYSIS

13.1 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. DOE conducted a manufacturer impact analysis (MIA)

to estimate the financial impact of higher energy conservation standards on manufacturers of

packaged terminal air conditioners (PTACs) and packaged terminal heat pumps (PTHPs), and to

assess the impact of such standards on employment and manufacturing capacity. The MIA has

both quantitative and qualitative aspects.

The quantitative part of the MIA primarily relies on the Government Regulatory Impact

Model (GRIM), an industry­cash­flow model adapted for 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

higher energy conservation standards by comparing changes in INPV between a base case and

the various trial standard levels (TSLs).

The qualitative part of the MIA addresses factors such as equipment characteristics,

characteristics of particular manufacturers, and market and equipment trends. It also assesses the

impact of standards on subgroups of manufacturers.

13.2 METHODOLOGY

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

preparation of an industry characterization, including data on market share, sales volumes and

trends, pricing, employment and financial structure. Phase II, “Industry Cash Flow,” focused on

the industry as a whole. In this phase, DOE used the GRIM to prepare an industry cash flow

analysis. Using publicly available information developed in Phase 1, DOE adapted the GRIM’s

generic structure to facilitate analysis of amended PTAC and PTHP standards. In Phase III,

“Sub­Group Impact Analysis,” DOE interviewed manufacturers representing over 90 percent of

domestic PTAC and PTHP sales. This group included both large and small manufacturers,

providing a representative cross­section of the industry. During these interviews, DOE discussed

financial topics specific to each manufacturer and obtained each manufacturer’s view of the

industry as a whole. The interviews provided valuable information that DOE used to evaluate

the impacts of a new standard on manufacturers’ cash flows, manufacturing capacities, and

employment levels.

In addition to characterizing the impact of amended energy conservation standards on

manufacturers’ cash flows, DOE also considered the impacts of the Environmental Protection

Agency (EPA) mandated R­22 refrigerant phaseout. As part of the MIA, DOE estimated inputs

for the GRIM characterizing the impact of the refrigerant phaseout on manufacturer’s shipments,

conversion costs, profitability, and ultimately, cash flows. Between 2006 and 2009, the GRIM

uses inputs from the engineering and shipments analysis for R­22 refrigerant equipment.

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EERE-2007-BT-STD-0012 COMMENT 02
Beginning with 2010, the GRIM uses inputs developed in the engineering analysis and in the

MIA for R­410A equipment. For further details about the refrigerant phaseout and alternative

refrigerant analysis, see Chapter 5 of this technical support document (TSD). The following

subsections describe more specifically the steps DOE took in developing the information on

which it based the MIA.

13.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE prepared a profile of the PTAC and PTHP industry that built

upon the market and technology assessment prepared for this rulemaking (see Chapter 3 of this

TSD). Before initiating the detailed impact studies, DOE collected qualitative and quantitative

financial information and past and present market data. This included estimated market shares of

both standard and non­standard size PTAC and PTHP manufacturers, corporate operating ratios,

wages, employment, and production cost ratios. The industry profile included a topdown cost

analysis of PTAC and PTHP manufacturers that DOE used to derive cost and preliminary

financial inputs for the GRIM (e.g., revenues; material; labor; overhead; depreciation; selling,

general and administrative expenses (SG&A); and research and development (R&D) expenses).

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

including Securities and Exchange Commission (SEC) 10–K reports, Standard & Poor’s (S&P)

stock reports, and corporate annual reports. In addition, DOE relied on information from its

engineering analysis, life­cycle cost analysis, and analysis of markups to determine equipment

price to characterize both standard and non­standard size PTAC and PTHP manufacturing

industries.

13.2.2 Phase II: Industry Cash­Flow Analysis and Interview Guide

In Phase II, DOE performed an industry cash­flow analysis and prepared written

guidelines for interviewing manufacturers. Phase II focused on the financial impacts of new

standards on the industry as a whole. Amended energy conservation standards can affect PTAC

and PTHP manufacturers in three distinct ways: (1) require additional investment, (2) raise

production costs, and (3) impact revenues through higher prices and, possibly, lower shipments.

The analytical tool DOE uses for calculating the financial impacts of amended energy

conservation standards on manufacturers is the GRIM. DOE performed a cash flow analysis

using the GRIM on the PTAC and PTHP industry to quantify these impacts.

13.2.2.1 Industry Cash­Flow Analysis

The GRIM uses several factors to determine a series of annual cash flows for the year

standards become effective and several years after implementation. These factors include annual

expected revenues; costs of sales; SG&A costs; taxes; and capital expenditures related to

depreciation, new standards, and maintenance. Inputs to the GRIM included manufacturing

costs, shipments forecasts, and price forecasts developed in other analyses. DOE derived the

manufacturing costs from the engineering analysis cost­efficiency curves and estimated typical

manufacturer markups from public financial reports and interviews with manufacturers. DOE

developed alternative markup scenarios based on discussions with manufacturers during the

rulemaking. DOE’s shipments analysis, presented in Chapter 10 of this TSD, provided the basis

for the shipments projection under each TSLs in the GRIM. Another input, financial

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EERE-2007-BT-STD-0012 COMMENT 02
information, was developed based on publicly available data and confidentially submitted

manufacturer information. The results of the GRIM are compared against base case projections

assuming the American Society of Heating, Refrigerating, and Air­Conditioning Engineers, Inc.

(ASHRAE) and the Illuminating Engineering Society of North America (IESNA) Standard 90.1­

1999 (ASHRAE/IESNA Standard 90.1­1999) efficiency levels are adopted by DOE. The

financial impact of amended energy conservation standards is the difference between the two

sets of discounted annual cash flows.

13.2.2.2 Interview Guide

During Phase III of the MIA, DOE conducted interviews with manufacturers to gather

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

direct employment, capital assets, and on industry competitiveness. Prior to the interviews, DOE

distributed an interview guide that provided a starting point to identify relevant issues and help

identify the impacts of amended energy conservation standards on individual manufacturers or

sub­groups of manufacturers. The interview guide covered current organizational characteristics,

industry infrastructure, manufacturer cash­flow analysis, a competitive impacts assessment, an

employment impacts assessment, and a manufacturing capacity impacts assessment.

13.2.3 Phase III: Sub­Group Analysis

During the course of the MIA, DOE interviewed manufacturers representing close to 90

percent of domestic PTAC and PTHP sales. Many of these same companies also participated in

interviews for the engineering analysis. However, the MIA interviews broadened the discussion

from primarily technology­related issues to include business related topics. One objective was to

obtain feedback from industry on the assumptions used in the GRIM and to isolate key issues

and concerns. DOE defined three distinctive subgroups that could be impacted by the amended

energy conservation standards: major manufacturers, small businesses, and manufacturers of

niche equipment. The following sections summarize the methodology and findings of this

assessment.

13.2.3.1 Manufacturer Interviews

The information gathered in Phase I and the cash­flow analysis performed in Phase II are

supplemented with information gathered during interviews with manufacturers during Phase III.

The interview process has a key role in the manufacturer impact analyses, since it provides an

opportunity for interested parties to express their views privately on important issues, allowing

confidential or sensitive information to be considered in the rulemaking process.

DOE established two subgroups for the MIA corresponding to the two types of PTAC

and PTHP equipment and manufacturers found within the industry including, standard and nonstandard size equipment. Based on this decision, DOE prepared two different interview guides –

one for standard size PTACs and PTHPs and one for non­standard size PTACs and PTHPs.

These interview guides were used to tailor the GRIM to incorporate unique financial

characteristics from each equipment size. Within each of these subgroups, DOE contacted

companies from its database of manufacturers, which provided a representation of each

subgroup. Small and large companies, subsidiaries and independent firms, and public and

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EERE-2007-BT-STD-0012 COMMENT 02
private corporations were interviewed. Interviews were scheduled well in advance in order to

provide every opportunity for key individuals to be available for comment. Although a written

response to the questionnaire was acceptable, DOE preferred an interactive interview process

because it helped clarify responses and provide the opportunity to identify additional issues.

DOE conducted detailed interviews with all manufacturers, which agreed to participate to

gain insight into the range of potential impacts and how this range varies with each TSL. During

the interviews, DOE solicited information on the possible impacts of energy conservation

standards on sales, direct employment, capital assets, and industry competitiveness. Both

qualitative and quantitative information are valuable to the interview process. Finally, a GRIM

was developed for both of the subgroups. The industry­wide cash flow analysis is an

aggregation of these two subgroups.

13.2.3.2 Revised Industry Cash­Flow 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 comment and

suggestions regarding the values selected for the parameters. Upon completion of the interviews,

DOE revised its industry cash flow model based on the feedback provided through the

interviews.

13.2.3.3 Manufacturer Sub­Group Analysis

Using average cost assumptions to develop an industry cash flow estimate is not adequate

for assessing differential impacts among sub­groups of manufacturers. Smaller manufacturers,

niche players, or manufacturers exhibiting a cost structure that differs significantly from the

industry average could be more negatively affected. Ideally, DOE would consider the impact on

every manufacturer individually; however, it typically uses the results of the industry

characterization to group manufacturers exhibiting similar characteristics. During the interview

process, DOE discussed the potential sub­groups and sub­group members that have been

identified for the analysis. DOE looked to the manufacturers and other stakeholders to suggest

what sub­groups or characteristics are the most appropriate for the analysis.

13.2.3.4 Small­Business Manufacturer Subgroup

DOE used the small business size standards published on January 31, 1996, as amended,

by the Small Business Administration (SBA) to determine whether any small entities would be

required to comply with the rule. 61 FR 3286 and codified at 13 CFR Part 121. The size

standards are listed by North American Industry Classification System (NAICS) code and

industry description. PTAC and PTHP manufacturing is classified under NAICS 333415. To be

categorized as a small business, a manufacturer of PTACs and PTHPs and its affiliates may

employ a maximum of 750 employees. The PTAC and PTHP industry is characterized by a

small number of domestic manufacturers. However, consolidation within the industry has

reduced the number of parent companies that manufacture similar equipment under different

affiliates and labels.

DOE surveyed the American Refrigeration Institute’s (ARI) Applied Directory of

Certified Product Performance (2006) and created a list of every manufacturer that had certified

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EERE-2007-BT-STD-0012 COMMENT 02
equipment ratings in the directory. DOE also asked stakeholders and ARI representatives within

the PTAC and PTHP industry if they were aware of any other small business manufacturers.

DOE then looked at publicly available data and contacted manufacturers, where needed, to

determine if they meet the SBA’s definition of a small business manufacturing facility and have

their manufacturing facilities located within the U.S. Based on this analysis, DOE estimates that

there are two small business manufacturers of PTACs and PTHPs, which DOE subsequently

contacted to request an interview. Both manufacturers agreed to on­site interviews to determine

if there are differential impacts on these companies that may result from the standard.

DOE found that, in general, small business manufacturers have the same concerns as

large manufacturers regarding energy conservation standards. In addition, DOE found no

significant differences in the R&D emphasis or marketing strategies between small business

manufacturers and large manufacturers. Therefore, for the equipment classes comprised

primarily of small business manufacturers, DOE believes the GRIM analysis, which models each

equipment class separately, is representative of the small business manufacturers affected by

standards.

13.2.3.5 Competitive Impact Assessment

Section 342 (6)(B)(i)(V) of the Energy Policy Act of 1992 (EPCA) directs DOE to

consider any lessening of competition that is likely to result from imposition of standards. It

further directs the U. S. Attorney General to determine the impacts, if any, of any decrease in

competition. DOE will make a determined effort to gather and report firm­specific financial

information and impacts. The competitive analysis will focus on assessing the impacts on

smaller, yet significant, manufacturers. The assessment will be based on manufacturing cost data

and on information collected from interviews with manufacturers. The manufacturer interviews

will focus on gathering information that would help in assessing asymmetrical cost increases to

some manufacturers, the potential increase in business risks from an increased proportion of

fixed costs, and potential barriers to market entry (e.g., proprietary technologies).

13.2.3.6 Manufacturing Capacity Impact

One of the significant outcomes of amended energy conservation standards could be the

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

The manufacturer interview guide has a series of questions to help identify impacts on

manufacturing capacity, specifically capacity utilization and plant location decisions in the

United States and North America with and without an energy conservation standard; the ability

of manufacturers to upgrade or remodel existing facilities to accommodate the new requirements

due to amended energy conservation standards; the nature and value of stranded assets, if any;

and estimates for any one­time restructuring and other charges, where applicable.

13.2.3.7 Employment Impact

The impact of amended energy conservation standards on employment is an important

consideration in the rulemaking process. To assess how domestic employment patterns might be

affected, the interview explored current employment trends in the air­conditioning industry. In

addition, the interview solicited manufacture views on changes in employment patterns that may

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result from more stringent standard levels. The employment impacts section of the interview

guide focused on current employment levels associated with manufacturers at each of their

production facilities, expected future employment levels with and without an amended energy

conservation standard, and differences in workforce skills and issues related to the retraining of

employees.

13.2.3.8 Cumulative Regulatory Burden

DOE recognizes and seeks to mitigate the overlapping effects on manufacturers of

amended energy conservation standards and other regulatory actions affecting the same

equipment. DOE analyzed and considered the impact on manufacturers of multiple, equipmentspecific regulatory actions.

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

regulations relevant to PTACs and PTHPs, including: hydrochlorofluorocarbon (HCFC)

phaseout, Federal energy conservation standards for other equipment manufactured by PTAC

and PTHP manufacturers, and other environmental regulations.

13.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES

The first question of each of the MIA interview guides asks: “What are the key issues for

your company regarding the PTAC and PTHP energy conservation standard rulemaking?” This

open question initiated dialogue with the manufacturers, enabling them to identify key points that

DOE would explore and discuss during the interview. This section describes the key issues

manufacturers felt were of the highest importance in relation to the PTAC and PTHP energy

conservation standards rulemaking and that would have the most significant impact on the

industry. Manufacturers indicated that, for the most part, the risks associated with these issues

increase with more stringent TSLs. The issues are overall concerns that many manufacturers

expressed and in some cases, are dependent upon standard and non­standard size equipment.

13.3.1 R­410A

According to all manufacturers interviewed, the most concerning issue in relation to the

PTAC and PTHP energy conservation standards rulemaking is the EPA mandated phaseout of

HCFC­based refrigerants that are used in current PTACs and PTHPs equipment. Every

manufacturer interviewed stated that it intends to switch from the current R­22 refrigerant to R410A refrigerant in the PTAC and PTHP equipment, regardless of equipment class. All

manufacturers interviewed expect to be affected by the refrigerant phaseout for the further

discussed reasons:

• Availability of R­410A rotary compressors – All of the manufacturers interviewed stated

their concern that only a small number of compressors utilizing R­410A refrigerant are or

will be available before the R­22 refrigerant must be replaced in 2010. Furthermore, not

all current cooling capacities available in R­22 refrigerant compressors are or will be

available in R­410A refrigerant versions. In addition, not all voltages currently offered

by some manufacturers of PTAC and PTHP equipment are or will be available in an R410A refrigerant version. All manufacturers noted that the small size of their industry

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gives them little to no leverage to encourage compressor manufacturers to develop R410A refrigerant compressors for them.

• Compressor performance degradation ­ According to all manufacturers of PTAC and

PTHP equipment, R­410A refrigerant compressors currently on the market have at least a

0.8 to 1.0 EER compressor performance degradation relative to the R­22 refrigerant

compressors that they are intended to replace. The degradation in compressor

performance can be attributed to several factors including a reduction in displacement,

increase in complexity, necessity of increase in strength of the compressor shell, and use

of non­mineral oils. As a result, some manufacturers anticipate difficulty initially

meeting even the ASHRAE/IESNA Standard 90.1­1999 efficiency levels with R­410Abased units.

• Increase in manufacturing costs ­ All manufacturers expect their PTAC and PTHP

equipment manufacturing costs to increase as the sealed­system portions of the

equipment are upgraded to handle the higher system pressures associated with R­410A

refrigerant. In addition to an increase in manufacturing cost to accommodate higher

working pressures associated with R­410A refrigerant and increased refrigerant and

compressor costs, manufacturers are concerned about the anticipated drop in compressor

efficiency, which would cause them to incorporate some level of redesign into their R410A refrigerant equipment to help offset this degradation and would further increase

manufacturing cost. All manufacturers noted that cost­recovery is very difficult in this

industry due to intense price competition. Multiple United States­based manufacturers

noted the entry of foreign­based competitors as a source for the intense price competition.

• Combination of regulations ­ All manufacturers anticipate that the combination of the R22 refrigerant phaseout and possible amendment of Federal energy conservation

standards will lead the industry to reduce the scope of equipment offered. In addition,

several manufacturers anticipate as a result of the three factors just discussed, shifts in

market share, consolidation within the industry, and/or the departure of marginal

manufacturers from the business.

13.3.2 Equipment Classes Definitions

Under the existing Federal energy conservation standards as shown in Table 1 and Table

2 of 10 CFR Part 431.97, PTACs and PTHPs are divided into two equipment classes. Current

equipment classes include PTACs and PTHPs at various cooling capacities. When ASHRAE

amended the efficiency levels for PTACs and PTHPs, it acknowledges the physical size

constraints between the varying sleeve sizes on the market. Consequently, ASHRAE/IESNA

Standard 90.1­1999 used the existing equipment classes, which are distinguished by equipment

type (i.e., air conditioner or heat pump) and cooling capacity, and further separated these

equipment classes by wall sleeve dimensions.

ASHRAE/IESNA Standard 90.1­1999 refers to wall sleeve dimensions in two categories:

“New Construction” and “Replacement.” ASHRAE/IESNA Standard 90.1­1999 does not

describes “New Construction,” but Table 6.21D, footnote b of ASHRAE/IESNA Standard 90.1­

1999 states that replacement efficiencies apply only to units: (1) “factory labeled as follows:

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EERE-2007-BT-STD-0012 COMMENT 02
Manufactured for Replacement Applications Only; Not to be Installed in New Construction

Projects”; and (2) “with existing wall sleeves less than 16 in. high and less than 42 in. wide.”

DOE understands that the “New Construction” category under ASHRAE/IESNA Standard 90.1­

1999 is residual, and covers all other PTAC and PTHPs. Hence, this category consists of

equipment with wall sleeve dimensions greater than or equal to 16 inches high and greater than

or equal to 42 inches wide, or lacking the requisite label.

Manufacturers of non­standard size PTACs and PTHPs anticipate that, if the

ASHRAE/IESNA Standard 90.1­1999 equipment class definition (i.e., equipment with wall

sleeve dimensions less than 16 inches high and less than 42 inches wide) is adopted by DOE, a

significant portion of the equipment they currently offer will be misclassified. For example, a

PTAC or PTHP unit with wall sleeve dimensions of 16.5 inches high and 27 inches wide would

be classified as standard size equipment under ASHRAE’s classification and DOE’s proposed

equipment classes. Non­standard size manufacturers stated that they manufacture these units on

demand in lower volumes and sell them to replace existing equipment with the same wall sleeve

dimensions. They assert that DOE establishment of equipment classes that correspond to

ASHRAE’s classifications will force a small volume of non­standard sleeve size equipment to

meet higher efficiency levels intended for standard size equipment. As a result, manufacturers

believe this could impact the availability of these non­standard equipment on the market because

non­standard equipment is physically constrained leaving manufacturers with limited options for

increasing the efficiency of this type of equipment. Further, some manufacturers estimated that

up to half of their equipment lines could be eliminated if DOE chooses to adopt ASHRAE’s

delineations of equipment classes.

13.3.3 ENERGY STAR Program

Many manufacturers of standard size PTACs and PTHPs pointed out that the ENERGY

STAR program for PTACs and PTHPs is currently under developed by DOE. According to

manufacturers, key to maintaining ENERGY STAR levels is setting minimum energy

conservation standards for PTACs and PTHPs that are similar and low enough to allow costeffective premium­efficiency PTHPs to be developed. To that end, all manufacturers with

knowledge of the ENERGY STAR development program expressed support for the ENERGY

STAR and minimum energy conservation standards programs to collaborate in setting standards

as a means of reducing manufacturer uncertainty and development expenses.

All manufacturers advocated a greater use of heat pumps as a means to increasing energy

efficiency, stating that their internal life­cycle cost calculations justify a market mix of about 20

percent PTACs and 80 percent PTHPs. According to manufacturers, the higher initial cost of

PTHPs discourages higher PTHP adoption since many buyers have fixed capital budgets and buy

on the basis of initial cost. Key to adopting a greater proportion of PTHPs would be an

ENERGY STAR program in conjunction with utility rebates, so the initial purchase cost of a

PTHP can be more competitive with that of a PTAC. State energy efficiency mandates such as

the possible ban on the use of PTACs in new construction in California can also boost PTHP

adoption rates.

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13.3.4 Timing

The anticipated timing of the unveiling of a new ENERGY STAR program for PTACs

and PTHPs (2008), the EPA mandated R­22 refrigerant phaseout (2010), and the effective date

of the DOE amended energy conservation standards rulemaking (2012) are a concern for all

manufacturers. All manufacturers stated that each of the programs would require a separate

development effort (though efforts related to ENERGY STAR are voluntary).

Most manufacturers stated they could see some potential gains from being able to

combine the redesign and testing efforts (i.e. the conversion to R­410A and an amended energy

conservation standard). For example, the sealed system portion could require upgrades to handle

the higher system pressures of R­410A. This transition could present a good opportunity for a

manufacturer to redesign a heat exchanger or make other modifications that would ultimately

require less testing when efforts are combined than if they were run serially. However, most

manufacturers were uncertain of the magnitude of the benefit that combining multiple research

and development tasks would entail.

Available budgets for research and development vary by manufacturer and some do not

have the shipment volumes to justify very large development programs. Consequently, one

redesign effort for any of the three new regulations facing the PTAC and PTHP industry could

consume some manufacturers’ entire research and development effort for several years.

All manufacturers noted the intense price competition in the PTAC and PTHP industry.

Most manufacturers doubted the efficiency levels they would be able to obtain with the available

R­410A rotary compressors. If manufacturers were able to manufacturer high efficiency R­410A

PTACs and PTHPs, manufacturers doubted they would be able to command a price premium

unless rebates usually associated with ENERGY STAR programs lowered acquisition costs for

customers. Many of their customers purchase PTACs and PTHPs for their respective buildings

on fixed budgets, which will remain unchanged regardless of the increasing manufacturing costs

to accommodate R­410A and amended energy conservation standards. In the absence of rebates,

the majority of manufacturers do not anticipate making high efficiency R­410A units.

All manufacturers requested greater transparency and shorter lead times regarding

amended energy conservation standards. All manufacturers also stated that they anticipate three

major transitions in the coming years (R­22 refrigerant phaseout, energy conservation standards,

ENERGY STAR voluntary standards). All of these programs currently have significant

uncertainty associated with them, making an orderly transition more difficult. All manufacturers

noted that they cannot plan and execute their respective strategies with a high degree of

confidence as long as some component equipment is not available and amended energy

conservation standards remain unknown. By the time energy conservation standards become

known, most manufacturers are unlikely to have enough time to start and finish their research

and development before the refrigerant phaseout becomes effective causing manufacturers to

undertake two separate design efforts.

With longer lead times, planning, research, and development could occur more easily and

reduce the business risk for industry participants. Some manufacturers noted that similar

transition points have caused participants in related heating, ventilating, and air­conditioning

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EERE-2007-BT-STD-0012 COMMENT 02
(HVAC) industries to go out of business. The failed companies had allegedly made the wrong

assumptions about amended energy conservation standards. Once higher­than­anticipated

energy conservation standards became public knowledge, these companies had to restart their

development programs, at significant cost and under intense time pressure. Hence, all PTAC and

PTHP manufacturers repeatedly asked for greater clarity and extended lead times regarding

amended energy conservation standards and ENERGY STAR specifications.

13.4 GRIM INPUTS AND ASSUMPTIONS

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

imposition of amended energy conservation standards. DOE relied on several sources to obtain

inputs for the GRIM in the form of data and assumptions. The GRIM’s accounting methods then

produced the results used to describe impacts on manufacturers.

13.4.1 Overview of the GRIM

The basic structure of the GRIM, illustrated in Figure 13.4.1, is a standard annual cash

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

financial information as inputs, and accepts a set of regulatory conditions 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, 2006, and continuing

explicitly to 2042. The model calculates the INPV by summing the stream of annual discounted

cash flows during this period.1

Figure 13.4.1 Using the GRIM to Calculate Cash Flow

The GRIM projected cash flows using standard accounting principles and compared

changes in INPV between the adoption of ASHRAE/IESNA Standard 90.1­1999 (the base case

scenario) and different TSLs for the amended energy conservation standard (the standard case

scenario). 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 I provides more technical details and user information for the GRIM.

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EERE-2007-BT-STD-0012 COMMENT 02
13.4.2 Sources GRIM Inputs

The GRIM uses several different sources for data inputs in determining the cash flows for

the industry, including corporate annual reports, credit ratings, the shipments model, the

engineering analysis, and the manufacturer interviews.

13.4.2.1 Corporate Annual Reports

Corporate annual reports to the Securities and Exchange Commission (SEC 10­Ks)

provided many of the financial inputs to the GRIM.2 These reports exist for publicly held

companies and are freely available to the general public. The SEC 10­Ks provide consistent

financial data for the consolidated corporation but do not provide detailed financial information

for the company’s PTACs or PTHPs lines. Some SEC 10­Ks are therefore more relevant than

others are to the analysis of the PTAC and PTHP industry, depending on the prominence that

business has in the company’s overall operations. In determining financial parameters for the

industry, DOE weighted corporate financial information contained in the SEC 10­Ks by each

company’s market share in PTAC and PTHP industry to arrive at industry­weighted averages.

DOE used corporate annual reports to derive the following GRIM inputs:

• Tax rate,

• Working capital,

• Sales, general, and administration expenses (SG&A),

• Research and development (R&D) expenses,

• Depreciation,

• Capital expenditures, and

• Net property, plant, and equipment (PPE).

DOE also used information from company SEC 10­K reports to calibrate the GRIM’s

operating profit margin against the industry weighted average.

13.4.2.2 Standard and Poor Credit Ratings

Standard and Poor (S&P) provides independent credit ratings, research, and financial

information. S&P reports are available for a nominal fee. DOE relied on S&P reports to

determine the industry’s average cost of debt for the cost of capital calculation.

13.4.2.3 Shipment Model

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

national impact analysis. The model relied on historical shipments data for PTAC and PTHP

from AHRI for the NOPR analysis. Chapter 10 of the TSD describes the methodology and

analytical model DOE used to forecast shipments. Additional shipment projections not included

in the shipments model, were developed for the MIA based upon manufacturer information

obtained during the interviews.

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13.4.2.4 Engineering Analysis

During the engineering analysis, DOE used a reverse­engineering methodology

supplemented by a design option approach to develop manufacturing cost estimates for standard

size PTACs and PTHPs with 9,000 Btu/h and 12,000 Btu/h cooling capacity, and non­standard

size PTACs and PTHPs with 11,000 Btu/h cooling capacity. The analysis provided labor,

materials, and overhead production costs, which are representative of PTAC and PTHP industry.

DOE calibrated the reverse­engineering cost model with individual manufacturers’ cost data, and

aggregated the costs for individual manufacturers to create cost­efficiency curves for the

industry. DOE then used the cost­efficiency relationship developed in the Engineering Analysis

for R­22 and R­410A as the production costs inputs to the GRIM.

13.4.2.5 Manufacturer Interviews

During the course of the MIA, DOE conducted interviews with manufacturers

representing over 90 percent of the industry. During these discussions, DOE obtained

information, which it used to determine and verify GRIM input assumptions. Key topics

discussed during the interviews and reflected in the GRIM include:

• Conversion capital expenditures (one­time investments in property, plant, and

equipment.)

• Equipment conversion expenses (one­time investments in research, equipment

development, testing, and marketing).

• The portion of the conversion capital expenditures that companies use to replace

stranded assets.

• R­410A conversion.

• Equipment cost structure:

• The portion of the manufacturer production costs related to materials,

labor, overhead, and depreciation costs.

• Projected total shipment and shipment distribution mix (both R­22 and R­410A

equipment).

• Engineering analysis estimated manufacturer production costs for PTACs and

PTHPs.

13.4.3 Financial Parameters

Table 13.4.1 provides financial parameters for five public companies engaged in

manufacturing and selling standard and non­standard size PTACs and PTHPs. The values listed

are averages over a five­year period (2002­2006).

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Table 13.4.1 GRIM Financial Parameters Based on 2002­2006 Weighted Company

Financial Data

Parameter

IndustryWeighted

Average

Manufacturer

A B C D E

Tax Rate

(% of Taxable Income) 35.5 26.9 36.8 32.9 47.7 44.6

Working Capital

(% of Revenue) 3.5 7.6 1.0 6.5 N/A* 4.4

SG&A

(% of Revenue) 14.1 11.9 12.2 17.5 18.5 21.4

R&D

(% of Revenues) 1.6 3.4 0.6 1.8 2.1 1.1

Depreciation

(% of Revenues) 1.7 1.6 1.3 1.6 3.1 3.3

Capital Expenditures

(% of Revenues) 1.8 1.4 1.8 2.3 1.9 1.7

Net Property, Plant,

and Equipment

(% of Revenues)

12.8 14.0 10.2 16.7 15.0 14.5

* Data was not available from the SEC 10K reports

These companies constitute approximately 75 percent of the PTAC and PTHP industry.

For other companies in the industry, the public data is not available or the HVAC business

figures could not be adequately disaggregated from other businesses segments and were not used

for the analysis. The values used in the GRIM, therefore, represent the industry’s weighted

average estimated with financial data from five publicly traded manufacturers weighted by their

respective market shares. During manufacturer interviews, manufacturers stated that the

financial parameters listed in Table 13.4.1 would not be significantly different between standard

and non­standard size PTAC and PTHP industries. Therefore, for the GRIM, DOE assumed all

the financial parameters would be the same for both standard and non­standard size PTAC and

PTHP industries.

13.4.4 Corporate Discount Rate

DOE used the weighted­average cost of capital (WACC) for the industry 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.1 DOE estimated the WACC for the standard and nonstandard PTACs and PTHPs industries based on several representative companies, using the

following formula:

WACC = After­Tax 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

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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 short­term Treasury Bill (T­Bill) 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 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 both standard and nonstandard size PTAC and PTHP industries is 12.7 percent as calculated in Table 13.4.2.

Table 13.4.2 Cost of Equity Calculation

Parameter

IndustryWeighted

Average

(%)

Manufacturer

A B C D E

(1) Average Beta

(2002 – 2006 year) 0.74 0.65 0.80 0.84 0.51 0.80

(2) Yield on 10 Year TBill (1990­2006) 5.9 ­ ­ ­ ­ ­

(3) Market Risk

Premium (1926­1999) 9.2 ­ ­ ­ ­ ­

Cost of Equity

(2)+((1)*(3)) 12.7 ­ ­ ­ ­ ­

Equity/Total Capital 24.4 71.1 33.6 36.6 ­207.1 95.2

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 risk­free rate. DOE used this

method to calculate the cost of debt for all five manufacturers. S&P had bond ratings for most

manufacturers, so DOE used these ratings to estimate the manufacturers’ cost of debt by adding

the relevant spread to the risk­free rate. There was one manufacturer with no S&P bond rating

available. In this case, DOE used the company’s size and interest coverage ratio to arrive at the

spread of corporate debt over risk­free securities. The interest coverage ratio measures a

company’s ability to service its debt­financing obligation through its earnings.2

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

risk­free rate. DOE used a long­term Treasury bond return (10­year bond return) because it

captures long­term inflation expectations and is less volatile than short­term rates in the GRIM.

The risk free rate is estimated as approximately six percent, which is the average 10­year

Treasury bond return over the period of 1990 to 2006.

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

bonds for four of the five public manufacturers over the period 2002­2006. To this, DOE added

the industry­weighted average spread to the average T­Bill 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 13.4.3 presents

the derivation of the cost of debt. Also shown is the capital structure of the industry, i.e. the debt

ratio (debt/total capital).

Table 13.4.3 Cost of Debt Calculation

Parameter

IndustryWeighted

Average

(%)

Manufacturer

A B C D E

S&P Bond Rating ­­ A B+ BBB CC A­*

(1) Yield on 10 year TBill (1990­2002) 5.9 ­ ­ ­ ­ ­

(2) Gross Cost of Debt 10 7.7 10.6 8.1 17.4 7.9

(3) Tax Rate 35.5 26.9 36.8 32.9 47.7 44.6

Net Cost of Debt

(2)x((1)­(3)) 6.5 ­ ­ ­ ­ ­

Debt/Total Capital 75.6 28.9 66.4 63.4 307.1 4.8

* Bond Rating was calculated

DOE estimated the standard and non­standard size PTAC and PTHP industries’ WACC

to be approximately 8.0 percent. Subtracting an inflation rate of 2.9 percent between 1990 and

2006, the inflation adjusted WACC, and the corporate discount rate used in the GRIM, is 5.0

percent.

13.4.5 Trial Standard Levels

DOE developed seven TSLs that include combinations of energy efficiency levels

representing comparable stringency for standard and non­standard size PTACs and PTHPs

equipment classes. Chapter 9 of the TSD describes the methodology DOE used to determine

each TSL. The EER levels used in the GRIM are presented in Table 13.4.4. The reference case

or baseline is the ASHRAE/IESNA Standard 90.1­1999 efficiency levels for each equipment

class.

13­15

EERE-2007-BT-STD-0012 COMMENT 02
Table 13.4.4 Standard Size and Non­Standard Size PTACs and PTHPs Baseline Efficiency

Levels and TSLs

Equipment

Class

(cooling

capacity)

Efficiency

Metric

Baseline

(ASHRAE/IESNA

Standard 90.1­1999)

TSL

1

TSL

2

TSL

3

TSL

4

TSL

5

TSL

6

TSL

7

MaxTech

Standard Size

PTAC EER 10.6 10.9 10.9 11.1 10.9 11.3 11.5 12.0

9,000 Btu/h

Standard Size

PTAC EER 9.9 10.2 10.2 10.4 10.2 10.6 10.8 11.5

12,000 Btu/h

Non­Standard

Size PTAC EER 8.6 9.4 9.4 9.7 9.4 10.0 10.7 11.2

11,000 Btu/h

Standard Size

PTHP

9,000 Btu/h

EER

COP

10.4

3.0

10.9

3.1

11.1

3.2

11.1

3.2

11.3

3.3

11.3

3.3

11.5

3.3

12.0

3.5

Standard Size

PTHP

12,000 Btu/h

EER

COP

9.7

2.9

10.2

3.0

10.4

3.1

10.4

3.1

10.6

3.1

10.6

3.1

10.8

3.1

11.7

3.3

Non­Standard

PTHP

11,000 Btu/h

EER

COP

8.5

2.6

9.4

2.8

9.7

2.8

9.7

2.8

10.0

2.9

10.0

2.9

10.7

2.9

11.4

2.9

13.4.6 NES­Shipments Forecast

The GRIM estimates manufacturer revenues based on total­unit­shipment forecasts and

the distribution of these values by EER. Changes in the efficiency mix at each standard level are

a key driver of manufacturer finances. For this analysis, the GRIM used both the national energy

savings (NES) shipments forecasts and a modified version referred to as the R­410A shipments

forecasts for both standard size and non­standard size PTACs and PTHPs from 2007 to 2042.

The total shipments forecasted by the NES in the base case for each equipment class were

distributed to the closest representative cooling capacity. For example, the total PTAC or PTHP

shipments with a cooling capacity less than 10,000 Btu/h for standard size equipment are

represented by the 9,000 Btu/h representative cooling capacity. Further explanation of

assumptions and calculations of total shipments can be found in the shipment analysis section of

this TSD (Chapter 9). Total shipments forecasted in the shipment analysis for all efficiency

levels in 2012 are shown in Table 13.4.5 and are further detailed below.

Table 13.4.5 Total NES­Shipments Forecast in 2012

Equipment Class (cooling capacities) Total Industry Shipments*

Standard Size PTACs (9,000 Btu/h) 97,900

Standard Size PTHPs (9,000 Btu/h) 76,500

Standard Size PTACs (12,000 Btu/h) 144,000

Standard Size PTHPs (12,000 Btu/h) 104,400

Non­Standard Size PTACs (11,000 Btu/h) 17,100

Non­Standard Size PTHPs (11,000 Btu/h) 12,900

* Estimates rounded to the nearest hundred

13­16

EERE-2007-BT-STD-0012 COMMENT 02
As part of the shipment analysis, DOE estimated the shipment distribution for PTACs

and PTHPs by efficiency. Table 13.4.6 through Table 13.4.11 show the distributions of

shipments by TSL estimated in the NES for various equipment classes for 2012.

Table 13.4.6 Base Case Distribution of Efficiencies for Standard Size PTAC Shipments

with a Cooling Capacity of 9,000 Btu/h in 2012 Estimated in the NES

Shipments

Efficiency

Level (EER)

Baseline

10.6

TSL 1, 2, 4

10.9

TSL 3

11.1

TSL 5

11.3

TSL 6

11.5

TSL 7

12.0

Baseline

10.6 19.2%  18.0% 17.2% 16.4%  15.6%  13.5%

Table 13.4.7 Base Case Distribution of Efficiencies for Standard Size PTHP Shipments

with a Cooling Capacity of 9,000 Btu/h in 2012 Estimated in the NES

Shipments

Efficiency

Level (EER)

Baseline

10.4

TSL 1

10.9

TSL 2, 3

11.1

TSL 4, 5

11.3

TSL 6

11.5

TSL 7

12.0

Baseline

10.4 18.8%  17.5% 17.0% 16.5%  15.8%  14.4%

Table 13.4.8 Base Case Distribution of Efficiencies for Standard Size PTAC Shipments

with a Cooling Capacity of 12,000 Btu/h in 2012 Estimated in the NES

Shipments

Efficiency

Level (EER)

Baseline

9.9

TSL 1, 2, 4

10.2

TSL 3

10.4

TSL 5

10.6

TSL 6

10.8

TSL 7

11.5

Baseline

9.9 19.9%  18.5% 17.5% 16.5%  15.5%  12.1%

Table 13.4.9 Base Case Distribution of Efficiencies for Standard Size PTHP Shipments

with a Cooling Capacity of 12,000 Btu/h in 2012 Estimated in the NES

Shipments

Efficiency

Level (EER)

Baseline

9.7

TSL 1

10.2

TSL 2, 3

10.4

TSL 4, 5

10.6

TSL 6

10.8

TSL 7

11.7

Baseline

9.7 19.8%  18.1% 17.5% 16.7%  15.8%  12.1%

Table 13.4.10 Base Case Distribution of Efficiencies for Non­Standard Size PTAC

Shipments with a Cooling Capacity of 11,000 Btu/h in 2012 Estimated in the NES

Shipments

Efficiency

Level (EER)

Baseline

8.6

TSL 1, 2, 4

9.4

TSL 3

9.7

TSL 5

10.0

TSL 6

10.7

TSL 7

11.2

Baseline

8.6 19.8%  18.6% 17.8% 16.9%  14.4%  12.5%

Table 13.4.11 Base Case Distribution of Efficiencies for Non­Standard Size PTHP

Shipments with a Cooling Capacity of 11,000 Btu/h in 2012 Estimated in the NES

Shipments

Efficiency

Level (EER)

Baseline

10.4

TSL 1

9.4

TSL 2, 3

9.7

TSL 4, 5

10.0

TSL 6

10.7

TSL 7

11.4

Baseline

8.5 19.1%  18.5% 17.8% 17.2% 14.9% 12.4%

13­17

EERE-2007-BT-STD-0012 COMMENT 02
13.4.7 R­410A­Shipments Forecast

The NES­shipments forecast estimates the total number of PTACs and PTHPs sold and

the efficiency distribution of this equipment for the base case and each standards case. During

the course of the MIA interviews, manufacturers were asked to comment on the NES­shipment

forecasts. For all equipment classes, manufacturers were in general agreement with the NES

total shipment results. However, there were different views concerning the impacts of the

refrigerant phaseout on the distribution mix of efficiencies in the base case.

In general, the majority of manufacturers agreed that total shipments of PTACs and

PTHPs would not be affected by the refrigerant phaseout. Therefore, DOE assumed that total

shipments for R­410A equipment are equivalent to the total shipments of R­22 regardless of the

refrigerant phaseout. However, manufacturers stated during interviews that the NES­shipments

forecast underestimate the shift in the distribution mix of efficiencies as a result of the refrigerant

phaseout. Manufacturers commented there will be an inherent system performance degradation

expected due to the use of R­410A. In particular, most manufacturers commented that they were

planning to comply with the refrigerant phaseout using a “drop­in” to meet the initial 2010

deadline. In a drop­in redesign, manufacturers continue to use the current basic R­22 design for

the PTAC or PTHP equipment, and only switch compressors, refrigerant and make other minor

adjustments.

DOE took into consideration all of the manufacturers’ concerns with the NES­shipments

forecast and derived an alternative shipments forecast (referred to as “R­410A­shipments

forecast”) for the base case, based on information received during the manufacturer interviews.

For the R­410A­shipments forecast, DOE made several assumptions to capture the potential

effects the refrigerant phaseout will have on both standard and non­standard size PTAC and

PTHP industries.

Several manufacturers interviewed stated that total shipments for both standard and nonstandard size equipment industry would not be affected by the refrigerant phaseout. Therefore,

DOE assumed that the total industry shipments forecasted in the shipment analysis would not

change due to the refrigerant phaseout (i.e., DOE assumed the R­410A equipment total industry

shipments to be equal to the R­22 equipment total industry shipments).

13.4.7.1 R­410A Base Case

Based on its analysis of the PTAC and PTHP industry, interviews with manufacturers,

and data provided by ARI, DOE assumed that standard and non­standard size PTAC and PTHP

equipment distribution by efficiency would shift according to the degradation in system

performance estimated in the engineering analysis in 2010 (i.e., effective date for the refrigerant

phaseout). Each percentage of the distribution is shifted by the system performance degradation

percentage estimated in the engineering analysis for each equipment class. For the R­410A base

case, DOE assumed that manufactures would “drop­in” R­410A compressors into existing

equipment platforms based on R­22 systems. Table 13.4.12 shows the estimated system

13­18

EERE-2007-BT-STD-0012 COMMENT 02
performance degradation percentage discussed in the engineering analysis for each equipment

class (see Chapter 5 of the TSD).

Table 13.4.12 Estimated System Performance Degradation by Equipment Class

Equipment Class (cooling capacity) System EER Degradation

Standard Size PTAC and PTHP 9,000 Btu/h 6.32 %

Standard Size PTAC and PTHP 12,000 Btu/h 7.55 %

Non­Standard Size PTAC and PTHP 11,000 Btu/h 6.81 %

DOE assumed that manufacturers incorporating a “drop­in” to their original R­22 designs

resulting in efficiency levels below ASHRAE/IESNA Standard 90.1­1999 levels would

incorporate some level of redesign into their equipment to achieve at least the baseline

efficiency. Therefore, DOE assumed the distribution of shipments in the R­410A base case that

fall below ASHRAE/IESNA Standard 90.1­1999 levels with the drop­in redesign would roll up

to baseline levels. Under the R­410A base case, the maximum efficiency available, i.e., maxtech, for standard size PTACs with a cooling capacity of 9,000 Btu/h is 12 EER for R­22 and

becomes 11.3 EER with R­410A degradation. Table 13.4.13 through Table 13.4.18 illustrated

the shift in the equipment distribution by the system performance degradation for each

equipment class from 2009 to 2010.

Table 13.4.13 R­410A Base Case Distribution of Efficiencies for Standard Size PTAC

Shipments with a Cooling Capacity of 9,000 Btu/h in 2010

R­410A Equipment Distribution by TSL (EER)

Shipment

Forecast

Year

Baseline

10.6

TSL 1, 2, 4

10.9

TSL 3

11.1

TSL 5

11.3

TSL 6

11.5

TSL 7

12.0

2009 19.2% 18.0% 17.2% 16.4% 15.6% 13.5%

2010 70.9%  15.6% ­ 13.5% ­ ­

Table 13.4.14 R­410A Base Case Distribution of Efficiencies for Standard Size PTHP

Shipments with a Cooling Capacity of 9,000 Btu/h in 2010

R­410A Equipment Distribution by TSL (EER)

Shipment

Forecast

Year

Baseline

10.4

TSL 1

10.9

TSL 2, 3

11.1

TSL 4, 5

11.3

TSL 6

11.5

TSL 7

12.0

2009 18.8% 17.5% 17.0% 16.5% 15.8% 14.4%

2010 69.8%  15.8% ­ 14.4% ­ ­

Table 13.4.15 R­410A Base Case Distribution of Efficiencies for Standard Size PTAC

Shipments with a Cooling Capacity of 12,000 Btu/h in 2010

R­410A Equipment Distribution by TSL (EER)

Shipment

Forecast

Year

Baseline

9.9

TSL 1, 2, 4

10.2

TSL 3

10.4

TSL 5

10.6

TSL 6

10.8

TSL 7

11.5

2009 19.9% 18.5% 17.5% 16.5% 15.5% 12.1%

2010 87.9%  ­ ­ 12.1% ­ ­

13­19

EERE-2007-BT-STD-0012 COMMENT 02
Table 13.4.16 R­410A Base Case Distribution of Efficiencies for Standard Size PTHP

Shipments with a Cooling Capacity of 12,000 Btu/h in 2010

R­410A Equipment Distribution by TSL (EER))

Shipment

Forecast

Year

Baseline

9.7

TSL 1

10.2

TSL 2, 3

10.4

TSL 4, 5

10.6

TSL 6

10.8

TSL 7

11.7

2009 19.8% 18.1% 17.5% 16.7% 15.8% 12.1%

2010 87.9%  ­ ­ ­ 12.1%  ­

Table 13.4.17 R­410A Base Case Distribution of Efficiencies for Non­Standard Size PTAC

Shipments with a 11,000 Btu/h Cooling Capacity in 2010

R­410A Equipment Distribution by TSL (EER))

Shipment

Forecast

Year

Baseline

8.6

TSL 1, 2, 4

9.4

TSL 3

9.7

TSL 5

10.0

TSL 6

10.7

TSL 7

11.2

2009 19.8% 18.6% 17.8% 16.9% 14.4% 12.5%

2010 73.1%  ­ ­ 14.4% 12.5%  ­

Table 13.4.18 R­410A Base Case Distribution of Efficiencies for Non­Standard Size PTHP

Shipments with a 11,000 Btu/h Cooling Capacity in 2010

R­410A Equipment Distribution by TSL (EER)

Shipment

Forecast

Year

Baseline

8.5

TSL 1

9.4

TSL 3

9.7

TSL 4, 5

10.0

TSL 6

10.7

TSL 7

11.4

2009 19.1% 18.5% 17.8% 17.2% 14.9% 12.4%

2010 72.6%  ­ ­ 14.9% 12.4% ­

13.4.7.2 Standards Case

As previously mentioned, DOE assumed that the shipment distributions for PTACs and

PTHPs would shift according to the different system degradations calculated in the engineering

analysis. To exam the effects of amended energy conservation standards on shipments, which

affects the INPV, DOE utilized the R­410A base case shipments described in section 13.4.7.1 as

the base case shipments. In other words, regardless of any proposed standards, the base case

shipments are assumed to be the R­410A base case shipments.

For the standards case utilizing the R­410A base case shipments, DOE assumed

shipments at lower efficiencies were most likely to roll up into higher efficiency levels in

response to an increase in energy conservation standards. This is a pessimistic scenario that

assumes that demand for high efficiency equipment is a function of its price without regards for

the standard level. Table 13.4.19 through Table 13.4.24 show the distributions of efficiencies for

the various equipment classes in 2012 using an R­410A base case under the roll­up scenario.

13­20

EERE-2007-BT-STD-0012 COMMENT 02
Table 13.4.19 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Standard Size PTACs with a Cooling Capacity of 9,000 Btu/h in 2012 –

Rollup Scenario

TSL

(EER)

Baseline

10.6

TSL 1, 2, 4

10.9

TSL 3

11.1

TSL 5

11.3

TSL 6

11.5

TSL 7

12.0

Baseline

10.6 70.9% 15.6% ­ 13.5% ­ ­

TSL 1

10.9 ­ 86.5% ­ 13.5% ­ ­

TSL 2

11.1 ­ ­ 86.5% 13.5% ­ ­

TSL 3

11.3 ­ ­ ­ 100% ­ ­

TSL 4

11.5 ­ ­ ­ ­ 100% ­

TSL 5

12.0 ­ ­ ­ ­ ­ 100%

Table 13.4.20 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Standard Size PTHPs with a Cooling Capacity of 9,000 Btu/h in 2012 –

Rollup Scenario

TSL

(EER)

Baseline

10.4

TSL 1

10.9

TSL 2, 3

11.1

TSL 4, 5

11.3

TSL 6

11.5

TSL 7

12.0

Baseline

10.4 69.8% 15.8% ­ 14.4% ­ ­

TSL 1

10.9 ­ 85.6% ­ 14.4% ­ ­

TSL 2

11.1 ­ ­ 85.6% 14.4% ­ ­

TSL 3

11.3 ­ ­ ­ 100% ­ ­

TSL 4

11.5 ­ ­ ­ ­ 100% ­

TSL 5

12.0 ­ ­ ­ ­ ­ 100%

Table 13.4.21 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Standard Size PTACs with a Cooling Capacity of 12,000 Btu/h in 2012 –

Rollup Scenario

TSL

(EER)

Baseline

9.9

TSL 1, 2, 4

10.2

TSL 3

10.4

TSL 5

10.6

TSL 6

10.8

TSL 7

11.5

Baseline

9.9 87.9% ­ ­ 12.1% ­ ­

TSL 1

10.2 ­ 87.9% ­ 12.1% ­ ­

TSL 2

10.4 ­ ­ 87.9% 12.1% ­ ­

TSL 3

10.6 ­ ­ ­ 100% ­ ­

TSL 4

10.8 ­ ­ ­ ­ 100% ­

TSL 5

11.5 ­ ­ ­ ­ ­ 100%

13­21

EERE-2007-BT-STD-0012 COMMENT 02
Table 13.4.22 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Standard Size PTHPs with a Cooling Capacity of 12,000 Btu/h in 2012 –

Rollup Scenario

TSL

(EER)

Baseline

9.7

TSL 1

10.2

TSL 2, 3

10.4

TSL 4, 5

10.6

TSL 6

10.8

TSL 7

11.7

Baseline

9.7 87.9% ­ ­ ­ 12.1% ­

TSL 1

10.2 ­ 87.9% ­ ­ 12.1% ­

TSL 2

10.4 ­ ­ 87.9% ­ 12.1% ­

TSL 3

10.6 ­ ­ ­ 87.9% 12.1% ­

TSL 4

10.8 ­ ­ ­ ­ 100% ­

TSL 5

11.7 ­ ­ ­ ­ ­ 100%

Table 13.4.23 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Non­Standard Size PTACs with a 11,000 Btu/h Cooling Capacity in 2012 –

Rollup Scenario

TSL

(EER)

Baseline

8.6

TSL 1, 2, 4

9.4

TSL 3

9.7

TSL 5

10.0

TSL 6

10.7

TSL 7

11.2

Baseline

8.6 73.1% ­ ­ 14.4% 12.5% ­

TSL 1

9.4 ­ 73.1% ­ 14.4% 12.5% ­

TSL 2

9.7 ­ ­ 73.1% 14.4% 12.5% ­

TSL 3

10.0 ­ ­ ­ 87.5% 12.5% ­

TSL 4

10.7 ­ ­ ­ ­ 100% ­

TSL 5

11.2 ­ ­ ­ ­ ­ 100%

13­22

EERE-2007-BT-STD-0012 COMMENT 02
Table 13.4.24 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Non­Standard Size PTHPs with a 11,000 Btu/h Cooling Capacity in 2012 –

Rollup Scenario

TSL

(EER)

Baseline

10.4

TSL 1

9.4

TSL 2, 3

9.7

TSL 4, 5

10.0

TSL 6

10.7

TSL 7

11.4

Baseline

8.5 72.6% ­ ­ 14.9% 12.4% ­

TSL 1

9.4 ­ 72.6% ­ 14.9% 12.4% ­

TSL 2

9.7 ­ ­ 72.6% 14.9% 12.4% ­

TSL 3

10.0 ­ ­ ­ 87.6% 12.4% ­

TSL 4

10.7 ­ ­ ­ ­ 100% ­

TSL 5

11.4 ­ ­ ­ ­ ­ 100%

13.4.8 Production Costs

Changes in equipment costs impact revenues and gross profits. As shown in the

engineering analysis (Chapter 5), equipment that is more efficient costs more to produce than

baseline equipment for a given capacity. For the MIA, DOE used the production costs derived in

the engineering analysis, with appropriate production volume assumptions. For instance, more

efficient equipment sold under existing energy conservation standards are manufactured at lower

production volumes than standard efficiency equipment. Enacting more stringent energy

conservation standards will increase production volumes for more efficient units.

The GRIM included the proportion of costs devoted to labor, materials, freight,

depreciation, and non­depreciation overhead that make up the full cost of the equipment. Using

the same industry calibrated reverse engineering methodology as in the engineering analysis,

DOE estimated the proportion of costs associated with each cost category. Table 13.4.25

through Table 13.4.30 provide the production cost assumptions used in the GRIM for R­22

standard and non­standard size PTAC and PTHP equipment as detailed in the engineering

analysis.

13­23

EERE-2007-BT-STD-0012 COMMENT 02
1

2

3

4

5

6

7

Table 13.4.25 Base Case Production Costs (2006$) used in the GRIM for R­22 Standard

Size PTAC 9,000 Btu/h Cooling Capacity

TSL

(EER)

Material Labor Overhead* Total

Baseline (10.6) $278.87 $13.60 $36.89 $329.36

TSL (10.9) $283.36 $13.82 $37.48 $334.66

TSL (10.9) $283.36 $13.82 $37.48 $334.66

TSL (11.1) $286.61 $13.98 $37.91 $338.50

TSL (10.9) $283.36 $13.82 $37.48 $334.66

TSL (11.3) $290.06 $14.15 $38.37 $342.58

TSL (11.5) $293.73 $14.33 $38.85 $346.91

TSL (12.0) $303.80 $14.82 $40.19 $358.80

*Includes Shipping and Depreciation

Table 13.4.26 Base Case Production Costs (2006$) used in the GRIM for R­22 Standard

Size PTHP 9,000 Btu/h Cooling Capacity

TSL

(EER)

Material Labor Overhead* Total

Baseline (10.4) $318.48 $15.53 $42.13 $376.14

TSL 1 (10.9) $325.69 $15.89 $43.08 $384.66

TSL 2 (11.1) $328.94 $16.05 $43.51 $388.50

TSL 3 (11.1) $328.94 $16.05 $43.51 $388.50

TSL 4 (11.3) $332.40 $16.21 $43.97 $392.58

TSL 5 (11.3) $332.40 $16.21 $43.97 $392.58

TSL 6 (11.5) $336.06 $16.39 $44.45 $396.91

TSL 7 (12.0) $346.13 $16.88 $45.79 $408.80

*Includes Shipping and Depreciation

Table 13.4.27 Base Case Production Costs (2006$) used in the GRIM for R­22 Standard

Size PTAC 12,000 Btu/h Cooling Capacity

TSL

(EER)

Material Labor Overhead* Total

Baseline (9.9) $317.98 $15.51 $42.06 $375.55

TSL 1 (10.2) $323.34 $15.77 $42.77 $381.88

TSL 2 (10.2) $323.34 $15.77 $42.77 $381.88

TSL 3 (10.4) $327.37 $15.97 $43.30 $386.65

TSL 4 (10.2) $323.34 $15.77 $42.77 $381.88

TSL 5 (10.6) $331.77 $16.18 $43.89 $391.84

TSL 6 (10.8) $336.54 $16.42 $44.52 $397.47

TSL 7 (11.5) $356.12 $17.37 $47.11 $420.59

*Includes Shipping and Depreciation

13­24

EERE-2007-BT-STD-0012 COMMENT 02
Table 13.4.28 Base Case Production Costs (2006$) used in the GRIM for R­22 Standard

Size PTHP 12,000 Btu/h Cooling Capacity

TSL

(EER)

Material Labor Overhead* Total

Baseline (9.7) $357.19 $17.42 $47.25 $421.87

TSL 1 (10.2) $365.67 $17.84 $48.37 $431.88

TSL 2 (10.4) $369.71 $18.03 $48.90 $436.65

TSL 3 (10.4) $369.71 $18.03 $48.90 $436.65

TSL 4 (10.6) $374.11 $18.25 $49.49 $441.84

TSL 5 (10.6) $374.11 $18.25 $49.49 $441.84

TSL 6 (10.8) $378.88 $18.48 $50.12 $447.47

TSL 7 (11.7) $404.87 $19.75 $53.56 $478.18

*Includes Shipping and Depreciation

Table 13.4.29 Base Case Production Costs (2006$) used in the GRIM for R­22 NonStandard Size PTAC 11,000 Btu/h Cooling Capacity

TSL

(EER)

Material Labor Overhead* Total

Baseline (8.6) $292.57 $53.10 $102.44 $448.10

TSL 1 (9.4) $296.88 $53.88 $103.95 $454.70

TSL 2 (9.4) $296.88 $53.88 $103.95 $454.70

TSL 3 (9.7) $299.69 $54.39 $104.93 $459.02

TSL 4 (9.4) $296.88 $53.88 $103.95 $454.70

TSL 5 (10.0) $303.16 $55.02 $106.15 $464.33

TSL 6 (10.7) $313.80 $56.95 $109.87 $480.63

TSL 7 (11.2) $323.58 $58.73 $113.30 $495.61

*Includes Shipping and Depreciation

Table 13.4.30 Base Case Production Costs (2006$) used in the GRIM for R­22 NonStandard Size PTHP 11,000 Btu/h Cooling Capacity

TSL

(EER)

Material Labor Overhead* Total

Baseline (8.5) $325.00 $58.99 $113.79 $497.78

TSL 1 (9.4) $329.52 $59.81 $115.38 $504.70

TSL 2 (9.7) $332.34 $60.32 $116.36 $509.02

TSL 3 (9.7) $332.34 $60.32 $116.36 $509.02

TSL 4 (10.0) $335.81 $60.95 $117.58 $514.33

TSL 5 (10.0) $335.81 $60.95 $117.58 $514.33

TSL 6 (10.7) $346.45 $62.88 $121.30 $530.63

TSL 7 (11.4) $360.65 $65.46 $126.28 $552.38

*Includes Shipping and Depreciation

DOE assumed that in 2010, manufacturers would sell PTACs and PTHPs priced as R410A equipment. Therefore, for 2010 and beyond, DOE used the production costs derived in the

engineering analysis for R­410A equipment.

Table 13.4.31 through Table 13.4.36 provide the production cost assumptions used in the

GRIM for R­410A standard and non­standard size PTAC and PTHP equipment as detailed in the

engineering analysis (Chapter 5 of the TSD).

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EERE-2007-BT-STD-0012 COMMENT 02
Table 13.4.31 Base Case Production Costs (2006$) used in the GRIM for R­410A Standard

Size PTAC 9,000 Btu/h Cooling Capacity

TSL

(EER)

Material Labor Overhead* Total

Baseline (10.6) $308.31 $15.04 $40.78 $364.13

TSL 1 (10.9) $313.74 $15.30 $41.50 $370.55

TSL 2 (10.9) $313.74 $15.30 $41.50 $370.55

TSL 3 (11.1) $317.62 $15.49 $42.01 $375.13

TSL 4 (10.9) $313.74 $15.30 $41.50 $370.55

TSL 5 (11.3) $321.71 $15.69 $42.56 $379.96

TSL 6 (11.5) $326.00 $15.90 $43.12 $385.03

TSL 7 (12.0) $337.65 $16.47 $44.66 $398.78

*Includes Shipping and Depreciation

Table 13.4.32 Base Case Production Costs (2006$) used in the GRIM for R­410A Standard

Size PTHP 9,000 Btu/h Cooling Capacity

TSL

(EER)

Material Labor Overhead* Total

Baseline (10.4) $347.29 $16.94 $45.94 $410.17

TSL 1 (10.9) $356.08 $17.37 $47.10 $420.56

TSL 2 (11.1) $359.97 $17.56 $47.62 $425.14

TSL 3 (11.1) $359.97 $17.56 $47.62 $425.14

TSL 4 (11.3) $364.05 $17.76 $48.16 $429.97

TSL 5 (11.3) $364.05 $17.76 $48.16 $429.97

TSL 6 (11.5) $368.35 $17.97 $48.72 $435.04

TSL 7 (12.0) $379.99 $18.54 $50.26 $448.79

*Includes Shipping and Depreciation

Table 13.4.33 Base Case Production Costs (2006$) used in the GRIM for R­410A Standard

Size PTAC 12,000 Btu/h Cooling Capacity

TSL

(EER)

Material Labor Overhead* Total

Baseline (9.9) $361.62 $17.64 $47.83 $427.09

TSL 1 (10.2) $368.90 $17.99 $48.80 $435.69

TSL 2 (10.2) $368.90 $17.99 $48.80 $435.69

TSL 3 (10.4) $374.20 $18.25 $49.50 $441.96

TSL 4 (10.2) $368.90 $17.99 $48.80 $435.69

TSL 5 (10.6) $379.88 $18.53 $50.25 $448.66

TSL 6 (10.8) $385.92 $18.82 $51.05 $455.79

TSL 7 (11.5) $409.96 $20.00 $54.23 $484.18

*Includes Shipping and Depreciation

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EERE-2007-BT-STD-0012 COMMENT 02
Table 13.4.34 Base Case Production Costs (2006$) used in the GRIM for R­410A Standard

Size PTHP 12,000 Btu/h Cooling Capacity

TSL

(EER)

Material Labor Overhead* Total

Baseline (9.7) $399.57 $19.49 $52.85 $471.91

TSL 1 (10.2) $411.23 $20.06 $54.40 $485.69

TSL 2 (10.4) $416.54 $20.32 $55.10 $491.96

TSL 3 (10.4) $416.54 $20.32 $55.10 $491.96

TSL 4 (10.6) $422.21 $20.59 $55.85 $498.66

TSL 5 (10.6) $422.21 $20.59 $55.85 $498.66

TSL 6 (10.8) $428.26 $20.89 $56.65 $505.79

TSL 7 (11.7) $459.99 $22.44 $60.85 $543.27

*Includes Shipping and Depreciation

Table 13.4.35 Base Case Production Costs (2006$) used in the GRIM for R­410A NonStandard Size PTAC 11,000 Btu/h Cooling Capacity

TSL

(EER)

Material Labor Overhead* Total

Baseline (8.6) $313.55 $56.91 $109.78 $480.25

TSL 1 (9.4) $321.39 $58.33 $112.53 $492.25

TSL 2 (9.4) $321.39 $58.33 $112.53 $492.25

TSL 3 (9.7) $325.52 $59.08 $113.98 $498.58

TSL 4 (9.4) $321.39 $58.33 $112.53 $492.25

TSL 5 (10.0) $330.32 $59.95 $115.65 $505.92

TSL 6 (10.7) $344.04 $62.44 $120.46 $526.94

TSL 7 (11.2) $356.02 $64.62 $124.65 $545.29

*Includes Shipping and Depreciation

Table 13.4.36 Base Case Production Costs (2006$) used in the GRIM for R­410A NonStandard Size PTHP 11,000 Btu/h Cooling Capacity

TSL

(EER)

Material Labor Overhead* Total

Baseline (8.5) $345.55 $62.72 $120.99 $529.25

TSL 1 (9.4) $354.03 $64.26 $123.96 $542.25

TSL 2 (9.7) $358.17 $65.01 $125.41 $548.58

TSL 3 (9.7) $358.17 $65.01 $125.41 $548.58

TSL 4 (10.0) $362.96 $65.88 $127.08 $555.92

TSL 5 (10.0) $362.96 $65.88 $127.08 $555.92

TSL 6 (10.7) $376.68 $68.37 $131.89 $576.94

TSL 7 (11.4) $393.97 $71.50 $137.94 $603.41

*Includes Shipping and Depreciation

13.4.9 Conversion Costs

Amended energy conservation standards typically cause manufacturers to incur one­time

conversion costs to bring their production facilities and equipment designs in compliance with

the new regulation. For the purpose of the MIA, DOE classified these one­time conversion costs

into two major groups, conversion capital expenditures and equipment conversion expenses.

Conversion capital expenditures are one­time investments in property, plant, and equipment to

adapt or change existing production facilities so that new equipment designs can be fabricated

and assembled under the new regulation. Equipment conversion expenses are one­time

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EERE-2007-BT-STD-0012 COMMENT 02
investments in research, development, testing, and marketing focused on making equipment

designs comply with amended energy conservation standards. As part of the analysis, DOE also

assumed manufacturers will have additional conversion costs to manufacture R­410A equipment.

The following sections describe in more detail DOE’s assumptions and inputs to the GRIM

related to amended energy conservation standards and refrigerant phaseout conversion costs.

13.4.9.1 Conversion Capital Expenditures

DOE evaluated the level of capital investment needed to comply with both the impending

refrigerant phaseout and the amended conservation standards at each TSL. The time required to

fabricate and assemble the equipment can potentially increase as efficiency increases.

13.4.9.2 R­410A Conversion

Currently, the PTAC and PTHP industry is standardized around the use of R­22

refrigerant in all its equipment. All manufacturers expressed the intent to transition to R­410A

once the use of R­22 is prohibited in 2010. The total investment required for this PTAC and

PTHP rulemaking include components that are difficult to disaggregate. This is the biggest

external burden on manufacturers of PTAC and PTHP equipment since conversion to R­410A

refrigerant would impact all PTACs and PTHPs. To quantify the magnitude of investments

needed to comply with the refrigerant phaseout, DOE first examined what would be required to

convert equipment from R­22 refrigerant to R­410A refrigerant. The level of investment needed

is a trade off between higher fixed costs (investments) and higher variable (equipment) costs.

It is possible to convert an existing R­22 unit to R­410A by performing a “drop­in”

conversion. At the very least, manufacturers would have to replace the R­22 compressor with a

comparable R­410A compressor, change the refrigerant, and change some other sealed system

components such as expansion valves and lubricating oils. An alternate solution would entail a

complete equipment redesign that takes advantage of R­410A properties and the available R410A components. Complete redesigns would allow manufacturers to optimize their units for

alternative refrigerant operation. In order for PTAC and PTHP manufacturers to convert all of

the existing equipment to R­410A, manufacturers would redesign, re­certify, and test their

existing equipment, alter the production process, and conduct some level of re­tooling. Several

manufacturers stated during the manufacturer interviews that they would need to extend their

knowledge base of R­410A commercial systems and utilize engineering resources from other

areas within their company before carrying out complete redesigns. In addition, manufacturing

facilities will need to expand to include the necessary infrastructure.

All manufacturers anticipate testing their existing equipment with R­410A refrigerants

and compressors. Should their equipment still meet baseline minimum energy conservation

standards, capital expenditures will be largely limited to evacuation and refrigerant­filling

machines, which may require modification or replacement in order to accommodate R­410A.

Manufacturers may recircuit their coils to optimize the units for R­410A, but this will not result

in a significant capital expense.

Equipment that does not meet baseline energy conservation standards with a simple

compressor “drop­in,” will require redesigns that are more extensive. Such redesigns may result

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EERE-2007-BT-STD-0012 COMMENT 02
in coil changes that require a manufacturer to invest in new heat exchanger tooling, heat

exchanger line expansions (to accommodate larger heat exchangers), and/or fixed tooling

investments (to accommodate bulkhead redesigns, for example). Few manufacturers have even

started their R­410A conversion efforts, making capital expenditure estimates (and their timing)

quite difficult to predict.

Presently, DOE anticipates a minimum system performance degradation of 6 percent to 8

percent due to R­410A conversion, and industry capital expenditures are being estimated on the

basis of market share and current equipment EER ratings. That is, manufacturers whose

equipment is not expected to meet minimum energy conservation standards due to the R­410A

conversion are expected to incur capital expenditures in excess of the simple line modifications

outlined above before the R­22 refrigerant phaseout in 2010.

For the GRIM, DOE estimated the capital expenditures on the basis of statements made

by manufacturers during interviews. Based on these interviews, the entire standard size PTAC

and PTHP industry is estimated to incur a one­time capital expenditure of $7.0 million for the

conversion of its units from R­22 to R­410A. For the non­standard size PTAC and PTHP

industry, DOE estimated that the entire industry would incur a one­time conversion capital

expenditure of $0.6 million for the conversion of its units from R­22 to R­410A.

13.4.9.3 Energy Conservation Standards

For each TSL, DOE is making an estimate similar to the R­410A conversion capital

expenditures outlined above. That is, for each TSL, a proportion of the equipment on the market

will have to be redesigned. The higher the TSL, the greater the proportion of the equipment on

the market that will require a redesign and possible capital expenditures.

Multiple manufacturers noted fierce price competition in the industry, which encourages

them to only introduce more efficient units as higher energy conservation standards become

effective. Thus, DOE projects that the capital expenditures required to meet amended energy

conservation standards will occur principally in the year before the amended energy conservation

standards become effective.

Based on manufacturer interviews, DOE assumed that the entire standard size PTAC and

PTHP industry will incur a conversion capital expenditure of $13.6 million to increase efficiency

from baseline to efficiency level 7 (TSL 7). For the non­standard size PTAC and PTHP industry,

DOE assumed the entire industry will incur a conversion capital expenditure of $3.8 million to

increase efficiency from baseline to efficiency level 7 (TSL 7). Table 13.4.37 and Table 13.4.38

summarizes the breakdown of conversion capital expenditure by TSL for the standard and nonstandard size PTAC and PTHP industries.

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EERE-2007-BT-STD-0012 COMMENT 02
1

2

3

4

5

6

7

Table 13.4.37 Conversion Capital Expenditure for Standard Size PTACs and PTHPs by

TSL

TSL

Standard Size Equipment Industry

Conversion Capital Expenditure (2006$ million)

PTAC PTHP Industry Total

Baseline 0.0 0.0 0.0

TSL 1.7 1.7 3.4

TSL 0.8 4.7 5.6

TSL 2.4 2.4 4.7

TSL 2.5 5.4 7.9

TSL 2.7 2.7 5.4

TSL 5.1 5.1 10.1

TSL 6.8 6.8 13.5

Table 13.4.38 Conversion Capital Expenditure for Non­Standard PTACs and PTHPs by

TSL

TSL

Non­Standard Size Equipment Industry

Conversion Capital Expenditure (2006$ million)

PTAC PTHP Industry Total

Baseline 0.0 0.0 0.0

TSL 1 0.6 0.6 1.3

TSL 2 0.3 1.9 2.2

TSL 3 1.0 1.0 1.9

TSL 4 0.9 2.6 3.5

TSL 5 1.3 1.3 2.6

TSL 6 1.6 1.6 3.2

TSL 7 1.9 1.9 3.9

13.4.9.4 Equipment Conversion Expenses

DOE conducted interviews with manufacturers to better understand the many steps that

manufacturers have to take before they can release new or improved equipment. All

manufacturers expect significant equipment conversion expenses as a result of the refrigerant

transition to R­410A as well as any TSLs beyond baseline. The magnitude of the required

investments varies by manufacturer and the analyzed TSL.

13.4.9.5 R­410A Conversion

All manufacturers who wish to compete in the industry beyond the 2010 R­22 refrigerant

phaseout will incur a R­410A equipment conversion expense since none of them currently

manufacture R­410A­based PTACs or PTHPs. The cost of converting equipment from R­22 to

R­410A refrigerants depends on many factors, such as the current heat exchanger configuration,

the burst strength of the sealed system, etc.

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EERE-2007-BT-STD-0012 COMMENT 02
Some manufacturers have already started preliminary unit testing based on existing R­22

units whose sole change is a R­410A­capable compressor. If such units can reach baseline

energy conservation standards, the necessary equipment modification can be limited to

qualifying more R­410A compressors, updated equipment literature, updated training for

technicians, some testing, and minor modifications to take advantage of higher system pressures.

Manufacturers whose units do not manage to exceed the baseline energy conservation

standard using R­410A are likely to require much more substantial investments to make their

units legal for sale. Manufacturers also have the option to increase the energy efficiency of their

units beyond baseline (to hit ENERGY STAR, for example), which could also result in

substantial investment requirements.

Due to the inherently higher costs of R­410A­based units and intense market competition,

DOE does not expect manufacturers to release R­410A­based units until R­22­based unit stocks

have been depleted. Based on the observed compressor degradation, market shares, and the

energy efficiencies of current R­22 units, DOE estimates that the entire standard size PTAC and

PTHP industry would spend approximately $14.0 million in equipment conversion costs to

convert all its equipment to R­410A. For non­standard size PTAC and PTHP industry, DOE

estimates that the entire industry would spend approximately $7.5 million in equipment

conversion costs to make the switch to R­410A.

Among other things, any new components scheduled for use require lengthy testing and

qualification trials to ensure that the manufacturer will not incur higher than expected warranty

expenses. Despite such testing, multiple manufacturers noted that they expected higher­thannormal initial failure rates for R­410A­based equipment due to higher system pressures and the

hydroscopic nature of the polyolester oil (POE) that lubricate R­410A­based systems.

13.4.9.6 Energy Conservation Standards

All manufacturers interviewed by DOE expect to start focusing on energy conservation

standards once their units have made the R­410A transition in 2010. Multiple manufacturers

expressed an interest in developing equipment platforms by 2010, which would only require

minor additional changes in order to accommodate higher energy conservation standards.

Multiple manufacturers also stated that they expected the currently wide distribution of

energy efficiencies to be reduced to clusters that just meet the minimum energy conservation

standards or any new ENERGY STAR standards. Thus, more manufacturers may start offering

two­tiered efficiency equipment in the marketplace, particularly if they expect rebates to

subsidize (and hence stimulate demand for) high­efficiency units.

DOE assumed that the entire standard size PTAC and PTHP industry will incur a

equipment conversion expense of $17.6 million to increase efficiency from baseline to efficiency

level 7 (TSL 7). For the non­standard size PTAC and PTHP industry, DOE assumed the entire

industry will incur a equipment conversion expense of $15 million to increase efficiency from

baseline to efficiency level 7 (TSL 7). Table 13.4.39 and Table 13.4.40 summarizes the

breakdown of equipment conversion by efficiency level for the standard and non­standard size

PTAC and PTHP industries.

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EERE-2007-BT-STD-0012 COMMENT 02
1

2

3

4

5

6

7

Table 13.4.39 Equipment Conversion Expenses for Standard Size PTACs and PTHPs by

TSL

TSL

Standard Size Equipment Industry

Equipment Conversion Expense (2006$ million)

PTAC PTHP Industry Total

Baseline 0 0 0

TSL 2.2 2.2 4.4

TSL 1.1 6.1 7.2

TSL 3.1 3.1 6.1

TSL 3.3 7.0 10.3

TSL 3.5 3.5 7.0

TSL 6.6 6.6 13.1

TSL 8.8 8.8 17.5

Table 13.4.40 Equipment Conversion Expenses for Non­Standard PTACs and PTHPs by

TSL

TSL

Non­Standard Size Equipment Industry

Equipment Conversion Expense (2006$ million)

PTAC PTHP Industry Total

Baseline 0.0 0.0 0.0

TSL 1 1.3 1.3 2.5

TSL 2 0.6 5.6 6.3

TSL 3 2.8 2.8 5.6

TSL 4 1.9 8.8 10.6

TSL 5 4.4 4.4 8.8

TSL 6 5.9 5.9 11.9

TSL 7 7.5 7.5 15.0

13.4.10 Markups

To understand how baseline and more efficient equipment are differentiated, DOE

reviewed manufacturer catalogs and utilized information gathered by manufacturers. To

estimate the manufacturer price of the equipment sold, DOE applied markups to the production

costs. For the analysis, DOE considered different markup scenarios based on manufacturer input

for both standard and non­standard size PTACs and PTHPs. Scenarios were used to bound the

range of expected equipment prices following amended energy conservation standards. For each

equipment class, DOE used the markup scenarios that best characterized the prevailing markup

conditions and described the range of market responses manufacturers expect as a result of

amended energy conservation standards.

DOE learned from interviews with manufacturers that the majority of manufactures only

offer one product line. A single product line means that there is no markup used to differentiate

a baseline piece of equipment from a premium piece of equipment. Through its analysis of the

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EERE-2007-BT-STD-0012 COMMENT 02
PTAC and PTHP industry, DOE also learned that profit margins associated with a PTAC and a

PTHP of the same manufacturer at the same cooling capacity do not vary significantly.

Therefore, DOE assumed the same markup for both PTACs and PTHPs.

After discussions with manufacturers, DOE believes there are two distinct markup

scenarios including flat markup and a markup where only part of the increased production costs

are able to be recovered, i.e., partial cost recovery.

13.4.10.1 Full Cost Recovery Markup

Under a full cost recovery markup strategy a single uniform “flat markup” is applied

across all equipment classes and for equipment at all TSLs. To derive these values, DOE

evaluated publicly available financial information on manufacturers of PTACs and PTHPs.

Individual markups for each company were calculated using the following formula:

Markup = 1 / (1­Gross Margin)

Where:

Gross Margin = (Revenues – Costs of Goods Sold) / Revenues

DOE arrived at an industry average markup of 1.29, where each company’s markup was

weighted by its market share. Further explanation and specific calculations for the full cost

recovery markup can be found in the engineering analysis (Chapter 5 of the TSD).

13.4.10.2 Partial Cost Recovery Markup

During interviews, several manufacturers stated that most customers buying PTACs and

PTHPs are on a fixed budget and therefore, any significant price increase would be detrimental

to the manufacturer’s unit sales and profits. In its GRIM analysis, DOE put together several

scenarios regarding how well manufacturers could recover the increased unit costs stemming

from R­410A conversion costs and costs associated with amended energy conservation

standards, which it called the 50­percent cost recovery markup.

Several manufacturers stated that they would not be able to transfer the entire increase in

manufacturing cost to customers as a result of the refrigerant phaseout or amended energy

conservation standards. Manufacturers have experienced similar trends in conforming to the

ground fault circuit interrupter (GFCI) cord requirements, where they experienced an increase in

manufacturing cost per unit due to the addition of the cord, but were not able to fully recoup the

costs of these cords from the customer. In addition, manufacturers also stated as an example the

increases in material prices the industry has experienced over the past several years.

Manufacturers stated that even though prices of raw materials, such as copper, have significantly

increased over the past several years, many of them have not been able to increase the price of

the PTAC and PTHP equipment accordingly. One manufacturer stated they were not able to

transfer any of the increases in costs associated with the material price increases experienced by

the industry, while the majority of the manufacturers stated they were able to recover

approximately 50­percent of the increases in manufacturing production costs.

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EERE-2007-BT-STD-0012 COMMENT 02
According to these manufacturers, transferring all the costs to the customers will increase

the unit’s price enough that customers might opt for other types of equipment. Therefore, for

both the refrigerant phaseout and the standards case, DOE modeled a 50­percent cost recovery

markup strategy. Under this markup, DOE assumed that manufacturers would only be able to

recover half the manufacturing costs they incur as a result of changing the equipment to comply

with either the refrigerant phaseout or the amended energy conservation standards. More details

of the markup scenarios used to bound the range of impacts from the refrigerant phaseout can be

found in section 13.5. More details of the markup scenarios used to bound the range of impacts

from the amended energy conservation standards can be found in section 13.6.

13.5 MANUFACTURING IMPACTS TO THE BASE CASE AS A RESULT OF THE

REFRIGERANT PHASEOUT

In 1987, the United Nations Environment Programme (UNEP) adopted the Montreal

Protocol on Substances that Deplete the Ozone Layer (Montreal Protocol). The Montreal

Protocol was designed to regulate and phase out ozone­depleting substances through a

collaborative and international effort. In 1988, the United States ratified the Montreal Protocol

and thus committed to the phaseout.

In 1990, the Clean Air Act was amended to include Title VI, "Stratospheric Ozone

Protection," to implement the Montreal Protocol. (42 U.S.C. 7671, et seq.) Title VI mandated

the phaseout by 2020 of hydrochlorofluorocarbon (HCFC) refrigerants for use in new airconditioning systems. (42 U.S.C. 7671d) Title VI, however, also authorized the EPA to

accelerate this date if certain criteria were met, (42 U.S.C. 7671e) and EPA subsequently adopted

a rule on December 10, 1993 to require the phaseout of HCFC refrigerants for use in new

equipment by 2010. 58 FR 65018. R­22, the only refrigerant currently used by PTACs and

PTHPs, is an HCFC refrigerant and subject to the phaseout requirement. Phaseout of this

refrigerant could have a significant impact on the manufacturing, performance, and cost of

PTAC and PTHP equipment.

As part of the engineering analysis, DOE performed an alternative refrigerant analysis to

characterize the performance and cost implications of using an alternative refrigerant in PTACs

and PTHPs. To characterize the impacts of conversion from R­22 refrigerant to R­410A

refrigerant on manufacturers’ cash flows, DOE used the production costs as described in Chapter

5 of the engineering analysis, the shipments distribution for the R­410A base case as described in

section 13.4.7 and the markup assumptions described in section 13.6.1.

As previously stated, all manufacturers voiced their concerns about the refrigerant

phaseout and possible impacts during manufacturer interviews. Several manufacturers stated

that they would not be able to fully recover the increase in manufacturing costs of PTACs and

PTHPs due to the conversion to R­410A refrigerant. Recent mandates for safer electrical

connections that caused unit cost increases did not result in higher prices, causing per­unit profits

to drop. From a customer utility viewpoint, the R­22 refrigerant phaseout will only result in

lower energy efficiency, so manufacturers will likely have great difficulty selling these units at

higher prices.

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EERE-2007-BT-STD-0012 COMMENT 02
To take manufacturers concerns into consideration, DOE examined a markup that would

translate to manufacturers recuperating half of the increased production costs associated with R410A equipment. Therefore, DOE modeled a 50­percent cost recovery markup scenario, which

assumes manufacturers would only be able to recover half the manufacturing costs they incur to

convert their equipment from R­22 into R­410A. Table 13.5.1 through Table 13.5.6 demonstrate

the 50­percent cost recovery mark­up scenarios of R­410A costs for the R­410A base case.

Table 13.5.1 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for

Standard Size PTAC with a 9,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (10.6) 1.23

TSL 1 (10.9) 1.23

TSL 2 (10.9) 1.23

TSL 3 (11.1) 1.23

TSL 4 (10.9) 1.23

TSL 5 (11.3) 1.23

TSL 6 (11.5) 1.23

TSL 7 (12.0) 1.23

Table 13.5.2 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for

Standard Size PTHP with a 9,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (10.4) 1.24

TSL 1 (10.9) 1.23

TSL 2 (11.1) 1.23

TSL 3 (11.1) 1.23

TSL 4 (11.3) 1.23

TSL 5 (11.3) 1.23

TSL 6 (11.5) 1.23

TSL 7 (12.0) 1.23

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EERE-2007-BT-STD-0012 COMMENT 02
Table 13.5.3 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for

Standard Size PTAC with a 12,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (9.9) 1.21

TSL 1 (10.2) 1.21

TSL 2 (10.2) 1.21

TSL 3 (10.4) 1.21

TSL 4 (10.2) 1.21

TSL 5 (10.6) 1.21

TSL 6 (10.8) 1.21

TSL 7 (11.5) 1.21

Table 13.5.4 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for

Standard Size PTHP with a 12,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (9.7) 1.22

TSL 1 (10.2) 1.22

TSL 2 (10.4) 1.22

TSL 3 (10.4) 1.22

TSL 4 (10.6) 1.22

TSL 5 (10.6) 1.22

TSL 6 (10.8) 1.22

TSL 7 (11.7) 1.21

Table 13.5.5 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for NonStandard Size PTAC with a 11,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (8.6) 1.25

TSL 1 (9.4) 1.24

TSL 2 (9.4) 1.24

TSL 3 (9.7) 1.24

TSL 4 (9.4) 1.23

TSL 5 (10.0) 1.23

TSL 6 (10.7) 1.23

TSL 7 (11.2) 1.23

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EERE-2007-BT-STD-0012 COMMENT 02
Table 13.5.6 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for NonStandard Size PTHP with a 11,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (8.5) 1.25

TSL 1 (9.4) 1.25

TSL 2 (9.7) 1.24

TSL 3 (9.7) 1.24

TSL 4 (10.0) 1.24

TSL 5 (10.0) 1.24

TSL 6 (10.7) 1.24

TSL 7 (11.4) 1.24

13.5.1 PTAC and PTHP Industry Financial Impacts as a result of the Refrigerant

Phaseout on the Base Case

Using the inputs and assumptions described in the previous section, the GRIM produced

indicators of financial impacts on the PTAC and PTHP industry as a result of the refrigerant

phaseout in 2010. The results are bound between the two mark­up scenarios and are solely

dependent upon manufacturers’ ability to pass on increased equipment costs resulting from the

refrigerant phaseout to the customer. The results are presented as impacts on INPV.

The INPV measures the industry value and is used in the MIA to compare the economic

impacts of the refrigerant phaseout on the base case. For the refrigerant phaseout, DOE is

interested in characterizing the impact on INPV in 2010. Using the GRIM, DOE compared the

base case INPV first if there was no conversion to R­410A refrigerant and then if the conversion

took place. DOE also examined the impacts on the base case INPV if manufacturers were not

able to fully recuperate all of the costs associated with R­410A conversion. Table 13.5.7 and

Table 13.5.8 provide the INPV estimates for the standard and non­standard size PTAC and

PTHP industries, respectively, under the different cost recovery scenarios.

Table 13.5.7 Changes in Base Case Industry Net Present Value from R­410A Conversion

for Standard Size PTACs and PTHPs

TSL

R­410A Base Case With

Full Cost Recovery

TSL

R­410A Base Case With

50­Percent Cost Recovery

INPV Change in INPV INPV Change in INPV

2006$

million

2006$

million

% Change 2006$

million

2006$

million*

% Change

R­22

Base Case 298 ­ ­ R­22

Base Case 298 ­ ­

R­410A

Base Case 305 7 2.34% R­410

Base Case 152 (146) ­49.00%

* Values in parenthesis are negative.

13­37

EERE-2007-BT-STD-0012 COMMENT 02
Table 13.5.8 Changes in Base Case Industry Net Present Value from R­410A Conversion

for Non­Standard Size PTACs and PTHPs

TSL

R­410A Base Case With

Full Cost Recovery

TSL

R­410A Base Case With

50­Percent Cost Recovery

INPV Change in INPV INPV Change in INPV

2006$

million

2006$

Million*

% Change 2006$

million

2006$

Million*

% Change

R­22

Base Case 32 ­ ­ R­22

Base Case 32 ­ ­

R­410A

Base Case 28 (4) ­12.5% R­410

Base Case 22 (10) ­31.25%

* Values in parenthesis are negative.

The results from the GRIM show that if DOE assumes standard size PTAC and PTHP

manufacturers will fully recover all costs associated with the R­410A refrigerant conversion, the

INPV would increase by approximately 2 percent. In this optimistic scenario, manufacturers

receive the benefits from equipment price increase by transferring costs to the customers.

Assuming that the standards size PTAC and PTHP manufacturers can only recover half of the R410A conversion expenses, the base case INPV will decrease approximately 49 percent. In this

pessimistic scenario, the INPV of the industry already decreases by half even before amended

energy conservation standards are taken into account.

For non­standard size PTAC and PTHP industry, the R­410A conversion expenses

decrease the INPV by approximately 13 percent if manufacturers fully recover increases in

manufacturing production costs. In this optimistic scenario, the industry experiences a decrease

in INPV even before amended energy conservation standards are taken into account. Assuming

that the non­standards size PTAC and PTHP industry can only recover half of the increases in

manufacturing production costs associated with the R­410A conversion, the INPV decreases by

approximately 31 percent. In this pessimistic scenario, the industry experiences a decrease in

INPV prior to amended energy conservation standards. It is important to note, irrespective of

mark­up scenario, the non­standard size PTAC and PTHP industry will experience a decline in

INPV in the base case as a result of the refrigerant phaseout due to the lower volumes in the

industry.

13.6 ENERGY CONSERVATION STANDARD IMPACT SCENARIOS

13.6.1 Markup Scenarios

DOE used the markup strategies described previously to create markup scenarios at each

TSL. DOE applied the flat markup and the partial cost recovery markup to both R­410A base

case scenarios to bound the range of impacts the PTAC and PTHP industry could experience

over the years as a result of amended energy conservation standards. Four distinct scenarios

emerge: (1) full cost recovery for the R­410A base case with a full cost recovery for amended

energy conservation standards; (2) 50­percent cost recovery for the R­410A base case with full

cost recovery for amended energy conservation standards; (3) full cost recovery for the R­410A

base case with a 50­percent cost recovery for the amended energy conservation standards; and

13­38

EERE-2007-BT-STD-0012 COMMENT 02
(4) 50­percent cost recovery for the R­410A base case with a 50­percent cost recovery for

amended energy conservation standards.

13.6.1.1 R­410A Base Case With Full Cost Recovery and Amended Energy

Conservation Standards With Full Cost Recovery

DOE modeled an optimistic scenario by assuming that manufacturing would be able to

fully recover increases in manufacturing production costs as a result of the refrigerant phaseout

and any amended energy conservation standards. In this optimistic scenario, DOE multiplied the

flat markup of 1.29 to all engineering analysis derived manufacturer production costs (MPCs) of

R­22 and R­410A equipment to calculate the manufacturer selling price (MSPs) necessary for

the GRIM.

13.6.1.2 R­410A Base Case With 50­Percent Cost Recovery and Amended Energy

Conservation Standards With Full Cost Recovery

DOE modeled a scenario in which manufacturers would only be able to recover half of

the increased manufacturing production costs from PTAC and PTHP customers as a result of the

refrigerant phaseout. Consequently, the base case INPV will be negatively impacted prior to the

effective date of the amended energy conservation standards in 2012. This scenario assumes that

increases in manufacturer production costs relating to changes to the equipment, which increase

the energy efficiency of the PTAC or PTHP and for which the customer will see a benefit, will

be able to be recovered fully by the manufacturers. DOE scaled the energy conservation

standards flat markup by factors that would account for a 50­percent cost recovery of the R410A conversion. Table 13.6.1 through Table 13.6.6 summarizes the energy conservation

standards full cost recovery markup with R­410A conversion 50­percent cost recovery markups

for both standard and non­standard size equipment analyzed.

Table 13.6.1 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With Full Cost Recovery for Standard Size

PTAC with a 9,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (10.6) 1.23

TSL 1 (10.9) 1.23

TSL 2 (10.9) 1.23

TSL 3 (11.1) 1.23

TSL 4 (10.9) 1.23

TSL 5 (11.3) 1.23

TSL 6 (11.5) 1.23

TSL 7 (12.0) 1.23

13­39

EERE-2007-BT-STD-0012 COMMENT 02
Table 13.6.2 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With Full Cost Recovery for Standard Size

PTHP with a 9,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (10.4) 1.24

TSL 1 (10.9) 1.23

TSL 2 (11.1) 1.23

TSL 3 (11.1) 1.23

TSL 4 (11.3) 1.23

TSL 5 (11.3) 1.23

TSL 6 (11.5) 1.23

TSL 7 (12.0) 1.23

Table 13.6.3 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With Full Cost Recovery for Standard Size

PTAC with a 12,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (9.9) 1.21

TSL 1 (10.2) 1.21

TSL 2 (10.2) 1.21

TSL 3 (10.4) 1.21

TSL 4 (10.2) 1.21

TSL 5 (10.6) 1.21

TSL 6 (10.8) 1.21

TSL 7 (11.5) 1.21

13­40

EERE-2007-BT-STD-0012 COMMENT 02
Table 13.6.4 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With Full Cost Recovery for Standard Size

PTHP with a 12,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (9.7) 1.22

TSL 1 (10.2) 1.22

TSL 2 (10.4) 1.22

TSL 3 (10.4) 1.22

TSL 4 (10.6) 1.22

TSL 5 (10.6) 1.22

TSL 6 (10.8) 1.22

TSL 7 (11.7) 1.21

Table 13.6.5 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With Full Cost Recovery for Non­Standard

Size PTAC with a 11,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (8.6) 1.25

TSL 1 (9.4) 1.24

TSL 2 (9.4) 1.24

TSL 3 (9.7) 1.24

TSL 4 (9.4) 1.24

TSL 5 (10.0) 1.24

TSL 6 (10.7) 1.23

TSL 7 (11.2) 1.23

Table 13.6.6 13.6.7 Markups Reflecting the R­410A Base Case With 50­Percent Cost

Recovery and Amended Energy Conservation Standards With Full Cost Recovery for NonStandard Size PTHP with a 11,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (8.5) 1.25

TSL 1 (9.4) 1.25

TSL 2 (9.7) 1.24

TSL 3 (9.7) 1.24

TSL 4 (10.0) 1.24

TSL 5 (10.0) 1.24

TSL 6 (10.7) 1.24

TSL 7 (11.4) 1.24

13­41

EERE-2007-BT-STD-0012 COMMENT 02
13.6.1.3 R­410A Base Case With Full Cost Recovery and Amended Energy

Conservation Standards With 50­Percent Cost Recovery

This scenario models the expectations of a few manufacturers who believe they will be

able to fully pass on any associated increases in manufacturer production costs to the customer as

a result of the refrigerant phaseout. Consequently, the base case will not change when R­410A

equipment comes into the market in 2010. However, these manufacturers also believe the

increases in manufacturer production costs will be too much for the customers to further

encompass, thus their profit margins will begin to be pinched. The implementation of the

refrigerant phaseout and the amended energy conservation standards are within three years of

one another. Consequently, some manufacturers do not believe they will be able to fully pass on

two increases in manufacturer production costs on to the customer. Instead, they believe it is

likely that only half of the costs associated with the increases in production costs for conforming

to the amended energy conservation standards will be recovered. This scenario is modeled using

a flat markup in the base case and a variable markup in the standards case. Table 13.6.8 through

Table 13.6.13 show the associated markups under a scenario where manufactures experience a

full cost recovery for the refrigerant phaseout and only a 50­percent cost recovery for the

amended energy conservation standards.

Table 13.6.8 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard

Size PTAC with a 9,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (10.6) 1.29

TSL 1 (10.9) 1.28

TSL 2 (10.9) 1.28

TSL 3 (11.1) 1.27

TSL 4 (10.9) 1.28

TSL 5 (11.3) 1.26

TSL 6 (11.5) 1.25

TSL 7 (12.0) 1.23

13­42

EERE-2007-BT-STD-0012 COMMENT 02
Table 13.6.9 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard

Size PTHP with a 9,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (10.4) 1.29

TSL 1 (10.9) 1.27

TSL 2 (11.1) 1.26

TSL 3 (11.1) 1.26

TSL 4 (11.3) 1.26

TSL 5 (11.3) 1.26

TSL 6 (11.5) 1.25

TSL 7 (12.0) 1.23

Table 13.6.10 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard

Size PTAC with a 12,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (9.9) 1.29

TSL 1 (10.2) 1.28

TSL 2 (10.2) 1.28

TSL 3 (10.4) 1.27

TSL 4 (10.2) 1.28

TSL 5 (10.6) 1.26

TSL 6 (10.8) 1.25

TSL 7 (11.5) 1.21

Table 13.6.11 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard

Size PTHP with a 12,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (9.7) 1.29

TSL 1 (10.2) 1.27

TSL 2 (10.4) 1.26

TSL 3 (10.4) 1.26

TSL 4 (10.6) 1.25

TSL 5 (10.6) 1.25

TSL 6 (10.8) 1.24

TSL 7 (11.7) 1.20

13­43

EERE-2007-BT-STD-0012 COMMENT 02
Table 13.6.12 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for NonStandard Size PTAC with a 11,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (8.6) 1.29

TSL 1 (9.4) 1.28

TSL 2 (9.4) 1.28

TSL 3 (9.7) 1.27

TSL 4 (9.4) 1.28

TSL 5 (10.0) 1.26

TSL 6 (10.7) 1.24

TSL 7 (11.2) 1.21

Table 13.6.13 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for NonStandard Size PTHP with a 11,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (8.5) 1.29

TSL 1 (9.4) 1.28

TSL 2 (9.7) 1.27

TSL 3 (9.7) 1.27

TSL 4 (10.0) 1.26

TSL 5 (10.0) 1.26

TSL 6 (10.7) 1.24

TSL 7 (11.4) 1.21

13.6.1.4 R­410A Base Case With 50­Percent Cost Recovery and Amended Energy

Conservation Standards With 50­Percent Cost Recovery

This scenario models the expectations of the majority of manufacturers who believe they

will never be able to fully pass on increases in manufacturer production costs to customers in a

price driven market. Their previous experiences with the increases in material costs over the past

several years and the implementation of GFCI cords have led them to the conclusion they were

never fully able to pass on these increased production costs to the customer. On average,

manufacturers believe they have been able to recover approximately 50 percent of the increased

in manufacturer production costs from customers.

As a result, DOE estimated the impacts on the industry by modeling a scenario where

manufacturers cannot fully recover costs from the refrigerant phaseout or the amended energy

conservation standards. In this pessimistic scenario, DOE applied a reduction in the markup to

the R­410A base case in 2010. Then, DOE further reduced the markup to reflect a 50­percent

cost recovery scenario as a result of energy conservation standards for each equipment class.

13­44

EERE-2007-BT-STD-0012 COMMENT 02
Table 13.6.14 through Table 13.6.19 summarizes the energy conservation standards 50­percent

cost recovery with R­410A conversion 50­percent cost recovery markups for both standard and

non­standard size equipment analyzed.

Table 13.6.14 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With 50­Percent Cost Recovery for

Standard Size PTAC with a 9,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (10.6) 1.23

TSL 1 (10.9) 1.22

TSL 2 (10.9) 1.22

TSL 3 (11.1) 1.21

TSL 4 (10.9) 1.22

TSL 5 (11.3) 1.20

TSL 6 (11.5) 1.19

TSL 7 (12.0) 1.17

Table 13.6.15 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With 50­Percent Cost Recovery for

Standard Size PTHP with a 9,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (10.4) 1.24

TSL 1 (10.9) 1.22

TSL 2 (11.1) 1.21

TSL 3 (11.1) 1.21

TSL 4 (11.3) 1.21

TSL 5 (11.3) 1.21

TSL 6 (11.5) 1.20

TSL 7 (12.0) 1.18

13­45

EERE-2007-BT-STD-0012 COMMENT 02
Table 13.6.16 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With 50­Percent Cost Recovery for

Standard Size PTAC with a 12,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (9.9) 1.21

TSL 1 (10.2) 1.20

TSL 2 (10.2) 1.20

TSL 3 (10.4) 1.19

TSL 4 (10.2) 1.20

TSL 5 (10.6) 1.18

TSL 6 (10.8) 1.17

TSL 7 (11.5) 1.13

Table 13.6.17 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With 50­Percent Cost Recovery for

Standard Size PTHP with a 12,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (9.7) 1.22

TSL 1 (10.2) 1.20

TSL 2 (10.4) 1.19

TSL 3 (10.4) 1.19

TSL 4 (10.6) 1.18

TSL 5 (10.6) 1.18

TSL 6 (10.8) 1.17

TSL 7 (11.7) 1.13

Table 13.6.18 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With 50­Percent Cost Recovery for

Standard Size PTAC with a 11,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (8.6) 1.25

TSL 1 (9.4) 1.23

TSL 2 (9.4) 1.23

TSL 3 (9.7) 1.22

TSL 4 (9.4) 1.23

TSL 5 (10.0) 1.21

TSL 6 (10.7) 1.19

TSL 7 (11.2) 1.15

13­46

EERE-2007-BT-STD-0012 COMMENT 02
Table 13.6.19 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With 50­Percent Cost Recovery for

Standard Size PTHP with a 11,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (8.5) 1.25

TSL 1 (9.4) 1.24

TSL 2 (9.7) 1.24

TSL 3 (9.7) 1.22

TSL 4 (10.0) 1.24

TSL 5 (10.0) 1.21

TSL 6 (10.7) 1.19

TSL 7 (11.4) 1.16

13.7 STANDARD SIZE PTAC AND PTHP INDUSTRY FINANCIAL IMPACTS

Using the inputs and scenarios described in the previous sections, the GRIM estimated

indicators of financial impacts on the standard size PTAC and PTHP industry. The following

sections detail additional inputs and assumptions related only to standard size PTACs and

PTHPs. The main results of the MIA also reported in this section are for two key financial

metrics: INPV and annual cash flows.

13.7.1 Impacts on Industry Net Present Value

The INPV measures the industry value and is used in the MIA to compare the economic

impacts of different TSLs. The INPV is different from the DOE’s NPV applied to the whole

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 estimated cash flows between 2007 and 2042, consistent

with the forecast period used in the national impact analysis (Chapter 10).

In the MIA, DOE compares the INPV of the R­410A base case (no amended energy

conservation standards) to that of each TSL. The difference in INPV is an estimate of the

economic impacts that implementing that particular TSL would have on the entire industry. For

the standard size PTAC and PTHP industry, DOE examined four markup scenarios as described

in the mark­up section above. Table 13.7.1 through Table 13.7.4 provide the INPV estimates for

the standard size PTAC and PTHP industry under the different scenarios.

13­47

EERE-2007-BT-STD-0012 COMMENT 02
Table 13.7.1 Changes in Industry Net Present Value for Standard Size PTACs and PTHPs

(R­410A Base Case Full Cost Recovery With Amended Energy Conservation Standards

Full Cost Recovery)

R­410A Base Case Full Cost Recovery With Amended Energy Conservation Standards Full Cost Recovery

Units Base

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV (2006 $ millions) 305 305 303 306 300 308 304 314

Change in INPV (2006 $ millions) ­ (0) (2) 1 (5) 3 (1) 9

(%) ­ ­0.1 ­0.8 0.2 ­1.5 0.9 ­0.2 3.1

R­410A Equipment

Conversion Expenses* (2006 $ millions) 14.0 ­ ­ ­ ­ ­ ­ ­

R­410A Capital

Investments* (2006 $ millions) 7.0 ­ ­ ­ ­ ­ ­ ­

Amended Energy

Conservation Standards

Equipment Conversion

Expenses

(2006 $ millions) ­ 4.4 7.2 6.1 10.3 7.0 13.1 17.5

Amended Energy

Conservation Standards

Capital Investments

(2006 $ millions) ­ 3.4 5.6 4.7 7.9 5.4 10.1 13.5

Total Investment

Required** (2006 $ millions) ­ 28.8 33.8 31.9 39.2 33.4 44.3 52.0

* R­410A conversion investments are made in 2009 and accounted in the base case.

** Total investment required includes both R­410A conversion investments and amended energy conservation

related investments

Table 13.7.2 Changes in Industry Net Present Value for Standard Size PTACs and PTHPs

(R­410A Base Case Full Cost Recovery With Ameneded Energy Conservation Standards

50­Percent Cost Recovery)

R­410A Base Case Full Cost Recovery With Amended Energy Conservation Standards 50­Percent Cost

Recovery

Units Base

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV (2006 $ millions) 305 268 257 250 249 236 210 139

Change in INPV (2006 $ millions) ­ (37) (48) (55) (56) (69) (95) (166)

(%) ­ ­12.1 ­15.7 ­18.1 ­18.3 ­22.7 ­31.2 ­54.5

R­410A Equipment

Conversion Expenses* (2006 $ millions) 14.0 ­ ­ ­ ­ ­ ­ ­

R­410A Capital

Investments* (2006 $ millions) 7.0 ­ ­ ­ ­ ­ ­ ­

Amended Energy

Conservation Standards

Equipment Conversion

Expenses

(2006 $ millions) ­ 4.4 7.2 6.1 10.3 7.0 13.1 17.5

Amended Energy

Conservation Standards

Capital Investments

(2006 $ millions) ­ 3.4 5.6 4.7 7.9 5.4 10.1 13.5

Total Investment

Required** (2006 $ millions) ­ 28.8 33.8 31.9 39.2 33.4 44.3 52.0

* R­410A conversion investments are made in 2009 and accounted in the base case.

** Total investment required includes both R­410A conversion investments and amended energy conservation

related investments

13­48

EERE-2007-BT-STD-0012 COMMENT 02
Table 13.7.3 Changes in Industry Net Present Value for Standard Size PTACs and PTHPs

(R­410A Base Case 50­Percent Cost Recovery With Ameneded Energy Conservation

Standards Full Cost Recovery)

R­410A Base Case 50­Percent Cost Recovery With Amended Energy Conservation Standards Full Cost

Recovery

Units Base

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV (2006 $ millions) 152 146 142 143 138 142 135 131

Change in INPV (2006 $ millions) ­ (6) (10) (9) (14) (10) (17) (20)

(%) ­ ­4.2 ­6.5 ­5.8 ­8.9 ­6.5 ­11.2 ­13.4

R­410A Equipment

Conversion Expenses* (2006 $ millions) 14.0 ­ ­ ­ ­ ­ ­ ­

R­410A Capital

Investments* (2006 $ millions) 7.0 ­ ­ ­ ­ ­ ­ ­

Amended Energy

Conservation Standards

Equipment Conversion

Expenses

(2006 $ millions) ­ 4.4 7.2 6.1 10.3 7.0 13.1 17.5

Amended Energy

Conservation Standards

Capital Investments

(2006 $ millions) ­ 3.4 5.6 4.7 7.9 5.4 10.1 13.5

Total Investment

Required** (2006 $ millions) ­ 28.8 33.8 31.9 39.2 33.4 44.3 52.0

* R­410A conversion investments are made in 2009 and accounted in the base case.

** Total investment required includes both R­410A conversion investments and amended energy conservation

related investments

Table 13.7.4 Changes in Industry Net Present Value for Standard Size PTACs and PTHPs

(R­410A Base Case 50­Percent Cost Recovery With Ameneded Energy Conservation

Standards 50­Percent Cost Recovery)

R­410A Base Case 50­Percent Cost Recovery With Amended Energy Conservation Standards 50­Percent Cost

Recovery

Units Base

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV (2006 $ millions) 152 111 99 90 90 74 46 ­51

Change in INPV (2006 $ millions) ­ (41) (53) (61) (62) (78) (106) (203)

(%) ­ ­27.1 ­34.8 ­40.5 ­40.7 ­51.3 ­69.8 ­133.3

R­410A Equipment

Conversion Expenses* (2006 $ millions) 14.0 ­ ­ ­ ­ ­ ­ ­

R­410A Capital

Investments* (2006 $ millions) 7.0 ­ ­ ­ ­ ­ ­ ­

Amended Energy

Conservation Standards

Equipment Conversion

Expenses

(2006 $ millions) ­ 4.4 7.2 6.1 10.3 7.0 13.1 17.5

Amended Energy

Conservation Standards

Capital Investments

(2006 $ millions) ­ 3.4 5.6 4.7 7.9 5.4 10.1 13.5

Total Investment

Required** (2006 $ millions) ­ 28.8 33.8 31.9 39.2 33.4 44.3 52.0

* R­410A conversion investments are made in 2009 and accounted in the base case.

** Total investment required includes both R­410A conversion investments and amended energy conservation

related investments

13­49

EERE-2007-BT-STD-0012 COMMENT 02
13.7.2 Impacts on Annual Cash Flow

While NPV is useful for evaluating the long­term effects of amended energy conservation

standards, short­term changes in cash flow are also important indicators of the industry’s

financial situation. For example, a large investment over a period of one or two 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 near. Thus, a short­term disturbance

can have long­term effects that the INPV cannot capture. To get an idea of the behavior of

annual net cash flows, DOE reports the annual net or free cash flows from 2007 through 2042 for

the different TSL levels. Figure 13.7.1 through Figure 13.7.4 present the annual net cash flows

for the base case and each of the seven TSLs for the standard size PTAC and PTHP industry

assuming the different markups and cost recovery scenarios.

Figure 13.7.1 Annual Net Cash Flows for Standard Size PTAC and PTHP Industry (R410A Base Case With Full Cost Recovery and Amended Energy Conservation Standards

With Full Cost Recovery)

$(15)

$(10)

$(5)

$­

$5

$10

$15

$20

$25

2006 2008 2010 2012 2014 2016 2018 2020

Year

Free Cash Flows (millions)

Base Case

TSL 1

TSL 2

TSL 3

TSL 4

TSL 5

TSL 6

TSL 7

Energy Conservation

Standards Effective Date

September 2012

R­22 Refrigerant

Phaseout Date

January 2010

13­50

EERE-2007-BT-STD-0012 COMMENT 02
$(15)

$(10)

$(5)

$­

$5

$10

$15

$20

$25

2006 2008 2010 2012 2014 2016 2018 2020

Year

Free Cash Flows (millions)

Base Case

TSL 1

TSL 2

TSL 3

TSL 4

TSL 5

TSL 6

TSL 7

Energy Conservation

Standards Effective Date

September 2012

R­22 Refrigerant

Phaseout Date

January 2010

Figure 13.7.2 Annual Net Cash Flows for Standard Size PTAC and PTHP Industry (R410A Base Case With Full Cost Recovery and Amended Energy Conservation Standards

With 50­Percent Cost Recovery)

$(15)

$(10)

$(5)

$­

$5

$10

$15

$20

$25

2006 2008 2010 2012 2014 2016 2018 2020

Year

Free Cash Flows (millions)

Base Case

TSL 1

TSL 2

TSL 3

TSL 4

TSL 5

TSL 6

TSL 7

Energy Conservation

Standards Effective Date

September 2012

R­22 Refrigerant

Phaseout Date

January 2010

Figure 13.7.3 Annual Net Cash Flows for Standard Size PTAC and PTHP Industry (R410A Base Case With 50­Percent Cost Recovery and Amended Energy Conservation

Standards With Full Cost Recovery)

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EERE-2007-BT-STD-0012 COMMENT 02
$(15)

$(10)

$(5)

$­

$5

$10

$15

$20

$25

2006 2008 2010 2012 2014 2016 2018 2020

Free Cash Flows (millions)

Base Case

TSL 1

TSL 2

TSL 3

TSL 4

TSL 5

TSL 6

TSL 7

Energy Conservation

Standards Effective Date

September 2012

R­22 Refrigerant

Phaseout Date

January 2010

Year

Figure 13.7.4 Annual Net Cash Flows for Standard Size PTAC and PTHP Industry (R410A Base Case With 50­Percent Cost Recovery and Amended Energy Conservation

Standards With 50­Percent Cost Recovery)

Prior to the effective date of the amended energy conservation standard, the cash flows

are nearly identical for all scenarios. Cash flows are driven by the level of capital investments

and equipment conversion expenses and the proportion of these investments spent every year.

With the implementation of R­410A conversion related investments, the cash flows show a sharp

decline in 2010 as companies use their financial resources to convert to the new refrigerant. In

the year the standard becomes effective, new capital investments begin production and a one

time write­down on stranded assets yields a positive increase in cash flows due to lower taxes

paid that year. After the standard announcement date, industry cash flows begin to decline as

companies use their financial resources to prepare for the new standard. As expected, the more

stringent the energy conservation standard, the greater the impact on industry cash flows.

13.8 NON­STANDARD SIZE PTAC AND PTHP INDUSTRY FINANCIAL IMPACTS

Using the inputs and assumptions described in the previous sections, the GRIM produced

indicators of financial impacts on the non­standard size PTAC and PTHP industry. The

following sections detail additional inputs and assumptions related only to non­standard size

PTACs and PTHPs including the main results of the MIA for two key financial metrics: INPV,

and annual cash flows.

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EERE-2007-BT-STD-0012 COMMENT 02
13.8.1 Impacts on Industry Net Present Value

As previously stated, the INPV measures the industry value and is used in the MIA to

compare the economic impacts of different TSLs. For the non­standard size PTAC and PTHP

industry, the GRIM estimated cash flows between 2007 and 2042, consistent with the forecast

period used in the national impact analysis (Chapter 10).

In the MIA, DOE compares the INPV of the base case (non new energy conservation

standards) to that of each TSL. The difference in INPV is an estimate of the economic impacts

that implementing that particular TSL would have on the entire industry. For the non­standard

size PTAC and PTHP industry, DOE examined all the markup scenarios in addition to the NESshipment and R­410A­shipment forecasts. Table 13.8.1 through Table 13.8.4 provide the NPV

estimates for the non­standard size PTAC and PTHP industry under the different cost recovery

scenarios.

Table 13.8.1 Changes in Industry Net Present Value for Non­Standard Size PTACs and

PTHPs (R­410A Base Case Full Cost Recovery With Amended Energy Conservation

Standard Full Cost Recovery)

R­410A Base Case Full Cost Recovery With Amended Energy Conservation Standards Full Cost Recovery

Units Base

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV (2006 $ millions) 28 25 22 23 18 21 18 16

Change in INPV (2006 $ millions) ­ (2) (5) (4) (9) (7) (9) (11)

(%) ­ ­7.7 ­18.5 ­15.7 ­34.17 ­24.6 ­32.9 ­40.6

R­410A Equipment

Conversion Expenses* (2006 $ millions) 0.6 ­ ­ ­ ­ ­ ­ ­

R­410A Capital

Investments* (2006 $ millions) 7.0 ­ ­ ­ ­ ­ ­ ­

Amended Energy

Conservation

Standards Equipment

Conversion Expenses

(2006 $ millions) ­ 2.5 6.3 5.6 10.6 8.8 11.9 15.0

Amended Energy

Conservation

Standards Capital

Investments

(2006 $ millions) ­ 1.3 2.2 1.9 3.5 2.6 3.2 3.9

Total Investment

Required** (2006 $ millions) ­ 11.4 16.1 15.1 21.7 18.9 22.7 26.5

* R­410A conversion investments are made in 2009 and accounted in the base case.

** Total investment required includes both R­410A conversion investments and amended energy conservation

related investments.

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EERE-2007-BT-STD-0012 COMMENT 02
Table 13.8.2 Changes in Industry Net Present Value for Non­Standard Size PTACs and

PTHPs (R­410A Base Case Full Cost Recovery With Amended Energy Conservation

Standard 50­Percent Cost Recovery)

R­410A Base Case Full Cost Recovery With Amended Energy Conservation Standards 50­Percent Cost Recovery

Units Base

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV (2006 $ millions) 28 23 20 20 15 17 13 7

Change in INPV (2006 $ millions) ­ (4) (7) (7) (12) (10) (15) (21)

(%) ­ ­14.8 ­26.9 ­25.7 ­43.9 ­37.5 ­53.4 ­74.7

R­410A Equipment

Conversion Expenses* (2006 $ millions) 0.6 ­ ­ ­ ­ ­ ­ ­

R­410A Capital

Investments* (2006 $ millions) 7.0 ­ ­ ­ ­ ­ ­ ­

Amended Energy

Conservation

Standards Equipment

Conversion Expenses

(2006 $ millions) ­ 2.5 6.3 5.6 10.6 8.8 11.9 15.0

Amended Energy

Conservation

Standards Capital

Investments

(2006 $ millions) ­ 1.3 2.2 1.9 3.5 2.6 3.2 3.9

Total Investment

Required** (2006 $ millions) ­ 11.4 16.1 15.1 21.7 18.9 22.7 26.5

* R­410A conversion investments are made in 2009 and accounted in the base case.

** Total investment required includes both R­410A conversion investments and amended energy conservation

related investments.

Table 13.8.3 Changes in Industry Net Present Value for Non­Standard Size PTACs and

PTHPs (R­410A Base Case 50­Percent Cost Recovery With Amended Energy Conservation

Standard Full Cost Recovery)

R­410A Base Case 50­Percent Cost Recovery With Amended Energy Conservation Standards Full Cost Recovery

Units Base

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV (2006 $ millions) 22 20 16 17 12 14 11 9

Change in INPV (2006 $ millions) ­ (3) (6) (5) (10) (8) (11) (14)

(%) ­ ­12.0 ­26.1 ­22.8 ­47.0 ­36.2 ­48.9 ­60.8

R­410A Equipment

Conversion Expenses* (2006 $ millions) 0.6 ­ ­ ­ ­ ­ ­ ­

R­410A Capital

Investments* (2006 $ millions) 7.0 ­ ­ ­ ­ ­ ­ ­

Amended Energy

Conservation

Standards Equipment

Conversion Expenses

(2006 $ millions) ­ 2.5 6.3 5.6 10.6 8.8 11.9 15.0

Amended Energy

Conservation

Standards Capital

Investments

(2006 $ millions) ­ 1.3 2.2 1.9 3.5 2.6 3.2 3.9

Total Investment

Required** (2006 $ millions) ­ 11.4 16.1 15.1 21.7 18.9 22.7 26.5

* R­410A conversion investments are made in 2009 and accounted in the base case.

** Total investment required includes both R­410A conversion investments and amended energy conservation

related investments.

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EERE-2007-BT-STD-0012 COMMENT 02
Table 13.8.4 Changes in Industry Net Present Value for Non­Standard Size PTACs and

PTHPs (R­410A Base Case 50­Percent Cost Recovery With Amended Energy Conservation

Standard 50­Percent Cost Recovery)

R­410A Base Case 50­Percent Cost Recovery With Amended Energy Conservation Standards 50­Percent Cost

Recovery

Units Base

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV (2006 $ millions) 22 18 14 15 9 11 6 0

Change in INPV (2006 $ millions) ­ (5) (8) (8) (13) (11) (16) (23)

(%) ­ ­20.4 ­36.1 ­34.7 ­58.5 ­51.5 ­73.2 ­101.1

R­410A Equipment

Conversion Expenses* (2006 $ millions) 0.6 ­ ­ ­ ­ ­ ­ ­

R­410A Capital

Investments* (2006 $ millions) 7.0 ­ ­ ­ ­ ­ ­ ­

Amended Energy

Conservation

Standards Equipment

Conversion Expenses

(2006 $ millions) ­ 2.5 6.3 5.6 10.6 8.8 11.9 15.0

Amended Energy

Conservation

Standards Capital

Investments

(2006 $ millions) ­ 1.3 2.2 1.9 3.5 2.6 3.2 3.9

Total Investment

Required** (2006 $ millions) ­ 11.4 16.1 15.1 21.7 18.9 22.7 26.5

* R­410A conversion investments are made in 2009 and accounted in the base case.

** Total investment required includes both R­410A conversion investments and amended energy conservation

related investments.

13.8.2 Impacts on Annual Cash Flow

While NPV is useful for evaluating the long­term effects of amended energy conservation

standards, short­term changes in cash flow are also important indicators of the industry’s

financial situation. To get an idea of the behavior of annual net cash flows, DOE reports the

annual net or free cash flows from 2007 through 2042 for the different TSL levels. Figure 13.8.1

through Figure 13.8.4 present the annual net cash flows for the base case and each of the seven

TSLs for the non­standard size PTAC and PTHP industry assuming the different cost recovery

scenarios.

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EERE-2007-BT-STD-0012 COMMENT 02
Free Cash Flows (millions)

$4 R­22 Refrigerant Energy Conservation

Phaseout Date Standards Effective Date

January 2010 September 2012

$2

$­

2006 2008 2010 2012 2014 2016 2018 2020

$(2)

$(4)

$(6)

Base Case

TSL 1

TSL 2

TSL 3

TSL 4

TSL 5

TSL 6

TSL 7

$(8)

$(10) Year

Figure 13.8.1 Annual Net Cash Flows for Non­Standard Size PTAC and PTHP Industry

(R­410A Base Case With Full Cost Recovery and Amended Energy Conservation

Standards With Full Cost Recovery)

$4 R­22 Refrigerant

Phaseout Date

January 2010

Energy Conservation

Standards Effective Date

September 2012

$2

Free Cash Flows (millions) $­

2006 2008 2010 2012 2014 2016 2018 2020

$(2)

$(4)

$(6)

Base Case

TSL 1

TSL 2

TSL 3

TSL 4

TSL 5

TSL 6

TSL 7

$(8)

$(10) Year

Figure 13.8.2 Annual Net Cash Flows for Non­Standard Size PTAC and PTHP Industry

(R­410A Base Case With Full Cost Recovery and Amended Energy Conservation

Standards With 50­Percent Cost Recovery)

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EERE-2007-BT-STD-0012 COMMENT 02
$(10)

$(8)

$(6)

$(4)

$(2)

$­

$2

$4

2006 2008 2010 2012 2014 2016 2018 2020

Year

Free Cash Flows (millions)

Base Case

TSL 1

TSL 2

TSL 3

TSL 4

TSL 5

TSL 6

TSL 7

Energy Conservation

Standards Effective Date

September 2012

R­22 Refrigerant

Phaseout Date

January 2010

Figure 13.8.3 Annual Net Cash Flows for Non­Standard Size PTAC and PTHP Industry

(R­410A Base Case With 50­Percent Cost Recovery and Amended Energy Conservation

Standards With Full Cost Recovery)

$(10)

$(8)

$(6)

$(4)

$(2)

$­

$2

$4

2006 2008 2010 2012 2014 2016 2018 2020

Year

Free Cash Flows (millions)

Base Case

TSL 1

TSL 2

TSL 3

TSL 4

TSL 5

TSL 6

TSL 7

Energy Conservation

Standards Effective Date

September 2012

R­22 Refrigerant

Phaseout Date

January 2010

Figure 13.8.4 Annual Net Cash Flows for Non­Standard Size PTAC and PTHP Industry

(R­410A Base Case With 50­Percent Cost Recovery and Amended Energy Conservation

Standards With 50­Percent Cost Recovery)

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EERE-2007-BT-STD-0012 COMMENT 02
Prior to the effective date of the amended energy conservation standard, the cash flows

are nearly identical for all scenarios. Cash flows are driven by the level of capital investments

and equipment conversion expenses and the proportion of these investments spent every year.

As expected, the cash flows have a sharp decline in 2009 when the industries incur the costs

necessary to convert to R­410A refrigerant. In the year the standard becomes effective, new

capital investments begin production and a one time write­down on stranded assets yields a

positive increase in cash flows due to lower taxes paid that year. After the standard

announcement date, industry cash flows begin to decline as companies use their financial

resources to prepare for the new standard. As expected, the more stringent the energy

conservation standard, the bigger the impact on industry cash flows.

13.9 OTHER IMPACTS

13.9.1 Employment

DOE estimated industry­wide labor expenditures based on the engineering analysis. Coil

fabrication; tube cutting and soldering; electronic connection assembly; package assembly;

testing; and packing of the completed PTAC or PTHP represent the bulk of the labor. DOE

incorporated these assumptions into the GRIM, which projects labor expenditures annually.

Labor expenditures are a function of the labor intensity of the equipment, the sales volume, and

an implicit wage assumption that remains fixed in real terms over time. Table 13.9.1 and Table

13.9.2 provides the changes in labor measured as the change in labor expenditures for standard

and non­standard size PTACs and PTHPs in 2012, the date DOE expects the amended energy

conservation become effective, compared to the base case.

Table 13.9.1 Projected Change in Labor Expenditures, Standard Size PTAC and PTHP

(2012)

Trial Standard Levels

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

+1.9% +2.4% +3.0% +2.9% +4.3% +5.7% +11.5%

Table 13.9.2 Projected Change in Labor Expenditures, Non­Standard Size PTAC and

PTHP (2012)

Trial Standard Levels

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

+1.8% +2.2% +2.7% +2.6% +3.7% +7.3% +11.6%

Based on the GRIM and the assumption that the majority of standard size PTACs and

PTHPs sold in the U.S. are manufactured outside the U.S., DOE estimated that there are

currently 450 production employees in the U.S. standard size PTAC and PTHP industry. For the

non­standard size PTAC and PTHP industry, DOE assumed that all non­standard size PTACs

and PTHPs sold in the U.S. are manufactured in the U.S. DOE estimated that there are currently

550 production employees in the U.S. non­standard size PTAC and PTHP industry. These

estimates excludes non­production workers and assumes a level annual production rate. In

practice, including non­production workers and seasonal effects, the actual number of employees

in the standard size PTAC and PTHP manufacturing industry would be higher. Based on these

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EERE-2007-BT-STD-0012 COMMENT 02
results, DOE expects no significant discernable direct employment impacts among standard and

non­standard size PTACs and PTHPs manufacturers for TSL1 through TSL7. This conclusion is

independent of any conclusions regarding employment impacts in the broader United States

economy, which are documented in Chapter 15 of this TSD. This conclusion also ignores the

possible relocation of domestic employment to lower­labor­cost countries, such as Mexico.

Manufacturers stated their concerns, throughout the interviews, about increasing offshore

competition entering the market over the past five years.

13.9.2 Manufacturing Capacity

According to the majority of standard and non­standard size PTAC and PTHP

manufacturers, amended energy conservation standards will not significantly impact the

manufacturer’s production capacity. Any necessary redesign of PTACs and PTHPs will not

change the fundamental assembly of the equipment. However, manufacturers anticipate

minimum changes to the assembly line due to the conversion to R­410A refrigerant. Because of

the properties of R­410A refrigerant, the assembly line will need to give special attention to

creating vacuums within each unit’s chambers, additional assembly will be needed if the number

of fan motors increases. Thus, DOE believes manufacturers will be able to maintain production

capacity levels and continue to meet market demand under amended energy conservation

standards.

13.9.3 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 for some

manufacturers, groups of manufacturers, or an entire industry. Assessing the impact of a single

regulation may overlook this cumulative regulatory burden.

Companies that produce a wider range of regulated equipment may be faced with more

capital and equipment development expenditures than their competitors. This can prompt those

companies to exit the market or reduce their equipment offerings, potentially reducing

competition. Smaller companies can be especially impacted since they have lower sales volumes

over which to amortize the costs of meeting new regulations. DOE considers that a proposed

standard is not economically justified if it contributes to an unacceptable level of cumulative

regulatory burden.

As previously mentioned, all PTAC and PTHP manufacturers believe that the refrigerant

phaseout will be the biggest external burden on manufacturers. DOE took all comments and

concerns into consideration and examined different impacts the refrigerant phaseout would have

on standard and non­standard size PTAC and PTHP industries. DOE first examined the possible

impacts on INPV from converting current production of R­22 equipment into R­410A equipment

(see section 13.5.1). DOE then examined the possible impacts of amended energy conservation

standards on the R­410A base case. In other words, DOE examined the cumulative impacts of

both R­410A conversion and conformation to amended energy conservation standards (see

sections 13.7 and13.8).

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EERE-2007-BT-STD-0012 COMMENT 02
13.9.3.1 Federal Regulations on PTACs and PTHPs and Other Equipment

Produced by the Same Manufacturers

In addition to the energy conservation regulations on PTACs and PTHPs, several other

Federal regulations and pending regulations apply to PTACs and PTHPs and other equipment

produced by the same manufacturers. DOE recognize that each regulation can significantly

impact manufacturers’ financial operations. Multiple regulations affecting the same

manufacturer can quickly strain manufacturers’ profits and possibly cause an exit from the

market. The most significant of these additional regulations are the EPA­mandated phaseout of

HCFCs and the potential residential central air conditioners and heat pumps Federal energy

conservation standard. Table 13.9.3 provides the timetables for these mandatory or potential

regulations.

Table 13.9.3 Federal Regulation Timetables

Regulation Key Affected Appliance Effective Date

Potential DOE energy

conservation standards

Central air conditioners and

heat pumps (residential)

06/2011

Potential DOE energy

conservation standards

Room air conditioners 06/2011

EPA phaseout of HCFC

refrigerant on new

equipment

Room and residential

central air conditioners, and

commercial air conditioners

01/2010

DOE recognizes that manufacturers of PTACs and PTHPs could also be affected by the

potential energy conservation standards for central air conditioner and heat pumps as well as for

room air conditioners. Additional investments necessary to meet these potential standards could

have significant impacts on manufacturers of PTACs and PTHPs. However, the magnitude of

the impacts can not be assessed at this time because DOE is currently undertaking a rulemaking

to potentially amend the energy conservation standard for these products. Details of these

rulemakings and the potential effective date of any potential amended energy conservation

standards for central air conditioners and heat pumps, and room air conditioners are unknown

13.9.3.2 Restriction of Hazardous Substances Directive

According to manufacturers, the Restriction of Hazardous Substance Directivea (RoHS)

will have some global impact on manufacturing of electrical and electronic equipment. Under

the directive, all manufacturers are banned from placing on the European Union market new

electrical and electronic equipment containing more than agreed levels of lead, cadmium,

mercury, hexavalent chromium, polybrominated biphenyl and polybrominated diphenyl ether

flame retardants. Although there is no Federal regulation on RoHS, California has passed SB 20:

Electronic Waste Recycling Act of 2003. Under this law, California limits the amount of

a Further information about RoHS can be found at

http://eur­lex.europa.eu/LexUriServ/site/en/oj/2003/l_037/l_03720030213en00190023.pdf

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EERE-2007-BT-STD-0012 COMMENT 02
hazards substances included in the RoHS directive that can be sold in California. Manufacturers

of PTACs and PTHPs have said that RoHS will have some impacts in the way the electronic

components in the PTACs and PTHPs are incorporated into the design. Currently, PTAC and

PTHP manufacturers have electronic components in the PTAC and PTHP design that contains

substances banned by the RoHS. However, manufacturers do not anticipate RoHS will

significantly impact the PTAC and PTHP industry as a whole.

13.10 CONCLUSIONS

The following sections summarize the different impacts for the two scenarios DOE

believes are most likely to capture the range of impacts on standard­size and non­standard size

manufacturers as a result of both amended energy conservation standards and refrigerant

phaseout. DOE also notes that while these two scenarios bound the range of most plausible

impacts on manufacturers, there potentially could be circumstances which cause manufacturers

to experience impacts outside of this range and more closely inline with the two other scenarios

analyzed.

To assess the higher end of the range of potential impacts for both standard and nonstandard size PTAC and PTHP industries, DOE considered the scenario reflecting R­410A base

case with full cost recovery and amended energy conservation standards with full cost recovery.

This scenario assumes that manufactures will fully recover costs associated with both conversion

of equipment to R­410A refrigerant and to conform to new amended energy conservation

standards.

To assess the lower end of the range of potential impacts for both standard and nonstandard size PTAC and PTHP manufacturers, DOE considered the scenario reflecting R­410A

base case with full cost recovery and amended energy conservation standards with 50­percent

cost recovery. This scenario assumes that manufacturers would fully recover costs associated

with conversion of the equipment to R­410A refrigerant, but only recover half of the costs

necessary for equipment to conform to new amended energy conservation standards.

13.10.1.1 Standard Size PTAC and PTHP Industry

At TSL 1, the impact on INPV and cash flow varies greatly depending on the

manufacturers and their ability to pass on increases in MPCs to the customer. DOE estimated

the impacts in INPV at TSL 1 to range from less than ­$1 million up to ­$37 million, or a change

in INPV of negative 0.1 percent up to negative 12.1 percent. At this level, the industry cash flow

decreases by approximately 25 percent, to $9 million, compared to the base case value of $12

million in the year leading up to the standards. Since more than 75 percent of the equipment

being sold is already at or above this level using R­22 refrigerant, those manufacturers that do

not fall below the efficiency levels specified by TSL 1 after the refrigerant phaseout will not

have to make additional modifications to their product lines to conform to the amended energy

conservation standards. DOE expects the lower end of the impacts to be reached, which

indicates that industry revenues and costs are not significantly negatively impacted as long as

manufacturers are able to fully recover the increase in manufacturer production cost from the

customer.

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EERE-2007-BT-STD-0012 COMMENT 02
TSL 2 is a combination TSL, which requires PTACs to be manufactured at TSL 1

efficiency levels and PTHPs to be manufacturers at TSL 3 efficiency levels. At TSL 2, the

impact on INPV and cash flow would be similar to TSL 1 and dependent on whether

manufacturers are able to fully recover the increases in MPCs from the customer. DOE

estimated the impacts in INPV at TSL 2 to range from ­$2 million up to ­$48 million, or a

change in INPV of ­0.8 percent up to ­15.7 percent. At this level, the industry cash flow

decreases by approximately 33 percent, to $8 million, compared to the base case value of $12

million in the year leading up to the standards. Up to 75 percent of PTACs and up to 50 percent

of PTHPs being sold are already at or above this level using R­22 refrigerant. Similar to TSL 1

for PTACs, manufacturers that do not fall below TSL 1 after the refrigerant phaseout will not

have to make additional modifications to their product lines to conform to TSL 2. For PTHPs,

the required higher level of efficiency will cause some manufactures to make additional

modifications to their product lines to conform to the amended energy conservation standards.

Even though TSL 2 requires efficiency levels that are different for PTACs and PTHPs, there are

small differences between the EER values for a given capacity in sleeve size, which will

minimize the amount of redesign manufacturers will have to undertake to modify their product

lines. DOE expects the impacts of TSL 2 on manufacturers of standard size PTACs will be

greater than TSL 1, but the magnitude of impacts largely depends on the ability of manufacturers

to fully recover the increase in MPC from the customer and minimize the level of redesign

between the two efficiency levels.

At TSL 3, the impact on INPV and cash flow continues to vary depending on the

manufacturers and their ability to pass on increases in MPCs to the customer. DOE estimated

the impacts in INPV at TSL 3 to range from approximately positive $1 million to ­$55 million,

or a change in INPV of 0.2 percent to ­18.1 percent. At this level, the industry cash flow

decreases by approximately 33 percent, to $8 million, compared to the base case value of $12

million in the year leading up to the standards. Currently the bulk of the equipment being sold is

already at or above this level using R­22 refrigerant. DOE does not expect industry revenues and

costs to be impacted significantly as long as standard size PTAC and PTHP manufacturers are

able to fully recover the increase in manufacturer production cost from the customer. The

positive INPV value is explained by increases in MSP due to higher costs of R­410A equipment,

which DOE assumed under this scenario that manufacturers would be able to fully recover the

investments needed for conversion to R­410A.

TSL 4 is a combination TSL, which requires PTACs to be manufactured at TSL 1

efficiency levels and PTHPs to be manufactured at TSL 5 efficiency levels. There is a 0.4 EER

difference between the efficiency levels for PTHPs as compared to PTACs. At TSL 4, DOE

estimated the impacts in INPV to range from approximately ­$5 million to ­$56 million, or a

change in INPV of ­1.5 percent up to ­18.3 percent. At this level, the industry cash flow

decreases by approximately 50 percent, to $6 million, compared to the base case value of $12

million in the year leading up to the standards. At higher TSLs, manufacturers have a harder

time fully passing on larger increases in MPCs to the customer. At to TSL 4, manufacturers are

concerned about whether they will be able to produce PTHPs, by the effective date of the

standard, that use R­410A refrigerant. Using the performance degradations from the engineering

analysis, TSL 4 for PTHPs using R­410A would correspond to the “max­tech” efficiency levels

for PTHPs unless higher efficiency compressors enter the market prior to the effective date of an

amended energy conservation standard. Based on information submitted by industry,

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EERE-2007-BT-STD-0012 COMMENT 02
manufacturers would be required to completely redesign their PTHP equipment lines. Since

most manufacturers only manufacturer one product line, and combine their R&D efforts for

PTACs and PTHPs into one design, manufacturers would likely choose to redesign their entire

equipment offering. Similar to TSL 1, for PTACs, manufacturers that do not fall below TSL 1

after the refrigerant phaseout will not have to make additional modifications to their PTAC

equipment lines to conform to TSL 4. Due to the disparity between efficiency levels of standard

size PTACs and PTHPs specified by TSL 4, DOE initially believes it is more likely that the

higher end of the range of impacts could be reached (i.e., a drop of 18.3 percent in INPV).

At TSL 5, DOE estimated the impacts in INPV to range from approximately $3 million

up to ­$69 million, or a change in INPV of approximately 1 percent up to ­22.7 percent. At this

level, the industry cash flow decreases by approximately 33 percent, to $8 million, compared to

the base case value of $12 million in the year leading up to the standards. As with TSL 4,

standard size PTAC and PTHP manufacturers continue to have a hard time fully passing on

larger increases in MPCs to the customer. At TSL 5, manufacturers stated their concerns over

the ability to be able to produce both PTACs and PTHPs by the effective date of the standard

utilizing R­410A refrigerant. Using the performance degradations from the engineering analysis,

TSL 5 would correspond to the “max­tech” efficiency levels for both PTACs and PTHPs using

R­410A unless higher efficiency compressors enter the market prior to the effective date of an

amended energy conservation standard. Based on information submitted by industry, the

majority of manufacturers would require a complete redesign of their equipment. Thus, DOE

believes it is likely that the higher range of the impacts could be reached.

At TSL 6, DOE estimated the impacts in INPV to range from ­$1 million up to ­$95

million, or a change in INPV of approximately ­0.2 percent up to ­31.2 percent. At this level, the

industry cash flow decreases by approximately 66 percent, to $4 million, compared to the base

case value of $12 million in the year leading up to the standards. At higher TSLs, manufacturers

have a harder time fully passing on larger increases in MPCs to the customer, and therefore

manufacturers expect the higher end of the range of impacts to be reached (i.e., a drop of 31.2

percent in INPV). TSL 6 requires the production of standard size PTACs and PTHPs using R410A that are not currently available on the market today assuming the system performance

degradations estimated in the engineering analysis. If manufacturers do not have the ability to

integrate a high efficiency R­410A compressor into the PTACs and PTHPs, the impacts could be

greater than characterized by DOE’s MIA analysis.

At TSL 7 (max tech), DOE estimated the impacts in INPV to range from $9 million up to

­$166 million, or a change in INPV of approximately 3 percent up to ­54.5 percent. At this level,

the industry cash flow decreases by approximately 92 percent, to $1 million, compared to the

base case value of $12 million in the year leading up to the standards. At higher TSLs,

manufacturers have a harder time fully passing on larger increases in MPCs to the customer, and

therefore manufacturers expect the higher end of the range of impacts to be reached (i.e., a drop

of 31.2 percent in INPV). Currently, there is only one model being manufactured at these

efficiency levels, which uses R­22 refrigerant. Most manufacturers did not provide DOE with

projected equipment conversion costs or capital conversion costs at this level, since they could

not conceive of what designs using R­410A might achieve this efficiency level. The industry

would experience an increase in net present value if it were able to fully pass through to

customers the increase in production costs associated with meeting new amended energy

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conservation standards. However, there is a risk of very large negative impacts if manufacturers’

expectations are realized about reducing profit margins. During the interviews, manufacturers

expressed disbelief at the possibility of manufacturing an entire equipment line at the max­tech

levels using R­410A refrigerant.

13.10.1.2 Non­Standard Size PTAC and PTHP Industry

At TSL 1, DOE estimated the impacts in INPV to range from less than ­$2 million up to ­

$4 million, or a change in INPV of ­7.7 percent up to ­14.8 percent. At this level, the industry

cash flow decreases by approximately 50 percent, $1 million, compared to the base case value of

$2 million in the year leading up to the standards. Since more than half of the equipment being

sold is already at or above this level using R­22 refrigerant, those manufacturers that do not fall

below TSL 1 using R­410A refrigerant will not have to make additional modifications to their

product lines to conform to the amended energy conservation standards. At TSL 1, the results of

the analysis show the least impact on manufacturers.

At TSL 2, DOE estimated the impacts in INPV to range from ­$5 million up to ­$7

million, or a change in INPV of ­18.5 percent up to ­26.9 percent. At this level, the industry cash

flow decreases by approximately 150 percent, ­$1 million, compared to the base case value of $2

million in the year leading up to the standards. At this level, the majority of the industry is

impacted. At higher TSLs, manufacturers have a harder time fully passing on larger increases in

MPCs to the customer, thus manufacturers expect the higher end of the range of impacts to be

reached (i.e., a drop of 26.9 percent in INPV).

At TSL 3, DOE estimated the impacts in INPV to range from ­$4 million up to ­$7

million, or a change in INPV of ­15.7 percent up to ­25.7 percent. At this level, the industry cash

flow decreases by approximately 150 percent, ­$1 million, compared to the base case value of $2

million in the year leading up to the standards. At higher TSLs, manufacturers continue to have

a hard time fully passing on larger increases in MPCs to the customer, thus manufacturers expect

the higher end of the range of impacts to be reached (i.e., a drop of 25.7 percent in INPV).

Manufacturers stated the level of re­design required to manufacturer all the equipment lines and

cooling capacity ranges would be so extensive that they would consider not investing the time,

research, or development efforts necessary to make equipment utilizing R­410A at TSL 3.

At TSL 4, DOE estimated the impacts in INPV to range from ­$9 million up to ­$12

million, or a change in INPV of ­34.2 percent up to ­43.9 percent. At this level, the industry cash

flow decreases by approximately 250 percent, ­$3 million, compared to the base case value of $2

million in the year leading up to the standards. At TSL 4, manufacturers stated their concerns

over the ability to be able to produce PTHPs by the effective date of the standard utilizing R410A refrigerant. Using the performance degradations from the engineering analysis, TSL 4 for

PTHPs would correspond to the “max­tech” efficiency levels for PTHPs unless higher efficiency

compressors enter the market prior to the effective date of an amended energy conservation

standard. Based on information submitted by industry, manufacturers would be required to

completely redesign their PTHP equipment lines.

At TSL 5, DOE estimated the impacts in INPV to range from ­$7 million up to ­$10

million, or a change in INPV of ­24.6 percent up to ­37.5 percent. At this level, the industry cash

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flow decreases by approximately 200 percent, ­$2 million, compared to the base case value of $2

million in the year leading up to the standards. Using the performance degradations from the

engineering analysis, TSL 5 for PTACs and PTHPs would correspond to the “max­tech”

efficiency levels for PTHPs unless higher efficiency compressors enter the market prior to the

effective date of an amended energy conservation standard.

At TSL 6, DOE estimated the impacts in INPV to range from ­$9 million up to ­$15

million, or a change in INPV of ­32.9 percent up to ­53.4 percent. At this level, the industry cash

flow decreases by approximately 300 percent, ­$4 million, compared to the base case value of $2

million in the year leading up to the standards.

At TSL 5 and 6, manufacturers stated their concerns over the ability to be able to produce

this equipment by the effective date of the standard utilizing R­410A. Based on information

submitted by industry, manufacturers would require a complete redesign of their non­standard

PTAC and PTHP platforms. Many manufacturers stated they would be unwilling to completely

redesign non­standard size equipment because of the small size of the market and the declining

sales. Manufacturers also commented non­standard size PTACs and PTHPs are manufactured to

order based on unique building designs for replacement applications. Therefore, manufacturers

did not see the advantage to completely redesigning non­standard size PTACs and PTHPs in

small and declining market.

At TSL 7, DOE estimated the impacts in INPV to range from ­$11 million up to ­$21

million, or a change in INPV of ­40.6 percent up to ­74.7 percent. At this level, the industry cash

flow decreases by approximately 350 percent, ­$5 million, compared to the base case value of $2

million in the year leading up to the standards. During their MIA interviews, all manufacturers

stated that this level is simply not achievable with current technologies after the refrigerant

phaseout. In addition, some manufacturers would not provide equipment conversion cost or

capital conversion costs at this level, since they could not conceive what designs might reach this

efficiency level.

Lastly, non­standard size manufacturers stated great concern over the amplification of

impacts if ASHRAE/IESNA Standard 90.1­1999 definitions are adopted by DOE and their

equipment lines are reduced. Several manufacturers believe the ASHRAE/IESNA Standard

90.1­1999 definitions would cause up to 50 percent of their equipment lines to be misclassified.

Consequently, this equipment would be required to meet the higher energy conservation

standards for standard size equipment, which manufacturers do not believe is attainable with

non­standard size equipment. If manufacturers’ expectations were reached with a declining

equipment offering, the INPV and cash flow impacts of the declining industry as estimated by

the MIA would be further negatively affected.

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REFERENCES

1 McKinsey & Company, Inc. Valuation: Measuring and Managing the Value of

Companies, 3rdEdition, Copeland, Koller, Murrin. New York: John Wiley & Sons, 2000.

2 Securities and Exchange Commission, Annual 10­K Reports, Various Years,

Washington D.C., <www.sec.gov>.

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