CHAPTER 1 7

. REGULATORY IMPACT ANALYSIS

TABLE OF CONTENTS

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

17.2 NON

- REGULATORY POLICIES ............................................................................... 17-2

17.2.1 Methodology ..................................................................................................... 17-2

17.2.2 Assumptions Regarding Non- Regulatory Policies ........................................... 17-3

17.2.3 Policy Interactions ............................................................................................ 17-4

17.3 NON

- REGULATORY POLICY AS SUMPTIONS ..................................................... 17-4

17.3.1 No New Regulatory Action .............................................................................. 17-4

17.3.2 Consumer Rebates ............................................................................................ 17-4

17.3.2.1 Methodology ...................................................................................... 17-5

17.3.2.2 Analysis .............................................................................................. 17-6

17.3.3 Consumer Tax Credits ...................................................................................... 17-7

17.3.4 Manufacturer Tax Credits ................................................................................. 17-9

17.3.5 Voluntary Energy Efficiency Targets ............................................................. 17-10

17.3.6 Early Replacement .......................................................................................... 17-12

17.3.7 Bulk Government Purchases ........................................................................... 17-14

17.4 IMPACTS OF NON

- REGULATORY ALTERNATIVES ........................................ 17-14

LIST OF TABLES

Table 17.1.1 Non

- Regulatory Alternatives to National Standards ...................................... 17-1

Table 17.2.1 Efficiency Levels in Proposed Standard Level for SPVAC <65 .................... 17-4

Table 17.3.1 Benefit/Cost Ratios Without and With Rebates for SPVAC <65 ................... 17-6

Table 17.3.2 Market Penetrations in 2019 Attributable to Consumer Rebates for

SPVAC <65 .................................................................................................... 17-7

Table 17.3.3 Market Penetrations in 2019 Attributable to Consumer Tax Credits for

SPVAC <65 .................................................................................................... 17-9

Table 17.3.4 Market Penetrations in 2019 Attributable to Manufacturer Tax Credits

for SPVAC <65 ............................................................................................. 17-10

Table 17.3.5 Market Penetrations in 2019 Attributable to Voluntary Energy Efficiency Targets for SPVAC <65 .............................................................. 17-11

Table 17.3.6 Market Penetrations in 2019 Attributable to Early Replacements for

SPVAC <65 .................................................................................................. 17-13

Table 17.4.1 Impacts of Non-Regulatory Alternatives for SPVAC <65 (TSL 2) ............. 17-15

LIST OF FIGURES

Figure 17.3.1 Market Penetration Curve for SPVAC <65 .................................................... 17-7 Figure 17.4.1 Market Penetration of SPVAC <65 Units Meeting the Target Level in Policy Cases .................................................................................................. 17-14

17 -iCHAPTER 17. REGULATORY IMPACT ANALYSIS

17.1 INTRODUCTION

The U.S. Department of Energy (DOE) has determined that the regulatory action described in the Federal Register notice associated with this TSD constitute s a “significant regulatory action” under Executive Order (E.O.) 12866, Regulatory Planning and Review. 58 FR 51735 (October 4, 1993). DOE followed the guidance of E.O. 12866 to provide “a n assessment, including the underlying analysis, of costs and benefits of potentially effective and reasonably feasible alternatives to the planned regulation, identified by the agencies or the public (including improving the current regulation and reasonably viable non-regulatory actions), and an explanation why the planned regulatory action is preferable to the identified potential

alternatives. ” 58 FR 51735, 51741.

To conduct this analysis, DOE used an integrated National Impact Analysis (NI A)

- RIA model built on the NIA model discussed in Chapter 10 for its analysis. DOE studied the impacts of the non-regulatory policies on the SPVU product class es with the predominant market shares,

which are 1 -phase and 3- phase single package vertical air conditioners less than 65 KBtu (SPVAC <65)

.

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

incentives for the same energy efficiency levels as the proposed standards for the products that are the subject of this rulema king. The non- regulatory policy alternatives are listed in Table

17.1.1 , which includes the “no new regulatory action” alternative. DOE evaluated each alternative in terms of its ability to achieve significant energy savings at a reasonable cost, and compared the effectiveness of each to the effectiveness of the proposed standard. Because of the very small market share of SPVAC <65 in government buildings, DOE did not analyze impacts

from the Bulk Government Purchases policy for this product.

Table 17.1.1 Non -Regulatory Alternatives to National Standards No New Regulatory Action

Consumer Rebates

Consumer Tax Credits

Manufacturer Tax Credits Voluntary Energy Efficiency Targets Early Replacement

Bulk Government Purchases

Sections 17.2 and 17.3 discuss the analysis of five selected policies listed above (excluding the alternative s of bulk government purchases and no new regulatory action). Section

17.4 present s the results of the policy alternatives

.

17 -117.2 NON

- REGULATORY POLICIES

This section describes the method DOE used to analyze the energy savings and cost

effectiveness of the non- regulatory policy alternatives for the identified SPVUs . DOE analyzed

the SPVAC <65 product class es , which comprise the majority of the market share of SPVUs

. This section also describes the assumptions underlying the analysis.

17.2.1 Methodology

DOE used its integrated NIA

- RIA spreadsheet model to calculate the national energy

savi ngs (NES) and net present value (NPV) associated with each non-regulatory policy alternative. Chapter 10 of the technical support document (TSD) describes the NIA spreadsheet model. Appendix 17-A discusse s the NIA -RIA integrated model approach.

DOE quantified the effect of each alternative on the purchase of products that meet the target efficiency level , which is defined as the efficiency level in the proposed standard s. After establishing the quantitative assumptions underlying each alternative , DOE appropriately revised inputs to the NIA- RIA spreadsheet model. The primary model inputs revised were market shares of prod ucts meeting target efficiency level . The shipments of products for any given year reflect a distribution of efficiency levels. DOE assumed that the proposed standards would affect 100 percent of the shipments of products that did not meet target level in the base case, a whereas the

non- regulatory policies would affect a smaller percentage of those shipments. DOE made certain

assum ptions about the percentage of shipments affected by each alternative policy. DOE used those percentages to calculate the shipment-weighted average energy consumption and costs of

SPVUs attributable to each policy alternative.

Increasing the efficiency of a product often increases its average installed cost. However

, operating costs generally decrease because energy consumption declines. DOE therefore

calculated an NPV for each non

- regulatory alternative in the same way it did for the proposed

standard s. In some policy scenarios, increases in total installed cost are mitigated by government

rebates or tax credits. Because DOE assumed that consumers would re

- pay credits and rebates in some way (such as additional taxes) , DOE did not include rebates or tax credits as a consumer benefit when calculating national NPV. DOE’s analysis also excluded any administrative costs for the non-regulatory policies; including such costs would decrease the NPVs slightly.

The following are key measures for evaluating the impact of each alternative.

a T he base case for the NIA is a market

- weighted average of units at several efficiency levels.

17 -2• National Energy Savings (NES) , given in trillion Btus (quads), describes the cumulative national primary energy saved over the lifetime of equipment purchased during the 30- year analysis period starting in the effective date of the policy (2019-2048 ). b

• Net Present Value (NPV) , represents the value of net mo netary savings in 2014, expressed in 2013$, from equipment purchased during the 30- year analysis period starting in the effective date of the policy (2019-2048) . DOE calculated the NPV as the difference between the present value of installed equipment cost and operating expenditures in the base case and the present value of th o se costs in each policy case. DOE calculated operating expenses (including energy costs ) for the life of equipment.

17.2.2 Assumptions Regarding Non- Regulatory Policies

The effects of non -regulatory policies are by nature uncertain, because they depend on program implementation

, marketing efforts , and on consumers’ responses to a program. Because the projected effects depend on assumptions regarding the rate of consumer participation, they are subject to more uncertainty than are the impacts of mandatory standards, which DOE

assumes will be met with full compliance. To increase the robustness of the analysis, DOE conducted a literature review regarding each non -regulatory policy and consulted with recognized experts to gather information on similar incentive programs that have been implemente d in the United States. By studying experiences with the various types of programs, DOE sought to make credible assumptions regarding potential market impacts. Section 17.3 presents the sources DOE relied on in developing assumptions about each alternative policy and reports DOE’s conclusions as they affected the assumptions that underlie the modeling of each

alternative policy.

Each non-regulatory policy that DOE considered would improve the average efficiency

of new SPVUs relative to their base case eff iciency scenario (which involves no new regulatory action). The analysis considered that each alternative policy would induce consumers to purchase

units h aving the same efficiency level as required by the proposed standard s (the target level ). As opposed to the standards case, however, the policy cases may not lead to 100 percent market penetration of units that meet the target level

.

b The analysis period is 2015

- 2044 for ASHRAE efficiency level, and 2019

- 2048 for higher efficiency levels. Since this RIA targets an efficiency level higher than the ASHRAE level, the 2019

- 2048 period is used.

17 -3Table 17.2.1 shows the effic iency level stipulated in the proposed standards for SPV AC

<65 units.

Table 17.2.1 Efficiency Levels in Proposed Standard Level for SPV AC <65

Equipment Class Cooling Capacity

Btu/h Efficiency Level

Single Package Vertical Air Conditioner <65,000 Btu/h EER =1 1. 0

DOE assumed that the effects of non- regulatory policies would last from the effective date of standards—2019—through the end of the analysis period, which is 2048.

17.2.3 Policy Interactions

DOE calculated the effects of each non -regulatory policy separately from those of the other policies. In practice, some policies are most effective when implemented in combination, such as early replacement implemented with consumer rebates . However, DOE attempted to

make conservative assumptions to avoid double-counting policy impacts. The resulting policy impacts are not additive ; the combined effect of several or all policies cannot be inferred from summing their results.

Section 17.4 presents graphs that show the market penetration estimated under each nonregulatory policy for the identified SPVU product class.

17.3 NON

- REGULATORY POLICY ASSUMPTIONS

The following subsections describe DOE’s analysis of the impacts of the five nonregulatory policy alternatives to proposed standard s for SPVUs

. (Because the alternative of No New Regulatory Action has no energy or NPV impacts, essentially representing the NIA base case, DOE did not perform any additional analysis for that alternative.) DOE de veloped

estimate s of the market penetration of high -efficiency products both with and without each of the

non- regulatory policy alternatives

.

17.3.1 No New Regulatory Action

The case in which no new regulatory action is taken with regard to the energy efficiency

of SPVUs constitutes the base case, as described in chapter 10

, National Impact Analysis. The base case provides the basis of comparison for all other policies. By definition, no new regulatory action yields zero NES and an NPV of zero dollars.

17.3.2 Consumer Rebates

DOE considered th e scenario in which the Federal government would provide financial

incentives in the form of rebate s to consumers for purchasing energy- efficient appliances

. This

17 -4policy provides a consumer rebate for purchasing SPVAC <65 that operate at the same efficiency as stipulated in proposed standard s ( target level ).

17.3.2.1 Methodology

DOE based its evaluation methodology for consumer rebates on a compreh ensive study of California’s potential for achieving energy efficiency . This study, performed by XENERGY,
Inc., c summarize d experiences with various utility rebate programs. 1 XENE RGY’s analytical

method utilized graphs, or penetration curves , that estimate the market penetration of a technology based on its benefit/cost (B/C) ratio. DOE consulted with experts and reviewed other methods of estimating the effect of consumer rebate programs on the market penetration of efficient technologies. The other methods, developed after the referenced XENERGY report was published, 2

, 3

, 4

, 5

, 6

, 7 used different approaches: other economic parameters (e .g., payback period), expert surveys, or model calibration based on specific utility program data rather than

multi

- utility data . Some models in use by energy efficiency program evaluation experts were so

client

- specific that generic relationships between economic parameters and consumer res ponse could not be established. 5 DOE decided that the most appropriate available method for this RIA analysis was the XENERGY approach of penetration curves based on B/C ratio, which incorporates lifetime operating c ost savings.

XENERGY’s model estimates market impacts induced by financial incentives based on the premise that two types of information diffusion drive the adoption of new technologies.

Internal sources of information encourage consumers to purchase new products primarily through word-of-mouth from early adopters. External sources affect consumer purchase decisions through marketing efforts and information from outside the consumer group. Appendix

17-A contains additional details on internal and external information diffusion.

XENERGY’s model equation accounts for the influences of both internal and external sources of information by superimposing the two components. Combining the two mechanisms for information diffusion, XENERGY’s model generates a set of penetration (or implementation)

curves for a policy measure. XENERGY calibrated the curves based on participation data from utility rebate programs. The curves illustrate the increased penetration (i.e., increased market share) of efficient products driven by consumer response to changes in B/C ratio induced by rebate programs. The penetration curves depict various diffusion patterns based on perceived barriers (from no barriers to extremely high barriers ) to consumer purchase of high- efficiency product s. DOE adjusted the XENERGY penetration curves based on expert advice founded on more recent utility program experience. 5

, 8

DOE modeled the effects of a consumer rebate policy for SPVUs by determining the

increase in market penetration of products meeting the target level relative to their market penetration in the base case. It used the interpolation method presented in Blum et al (2011) 9 to

c XENERGY is now owned by KEMA, Inc. ( www.kema.com )

17 -5create customized penetration curves based on relationships between actual base case market penetrations and actual B/C ratios. To inform its est imate of consumer B/C ratios provided by a rebate program, DOE performed a thorough nationwide search for existing rebate programs for SPVUs. Since it did not find rebates for SPVUs, it instead gathered data on utility or agency

rebates for commercial unit ary air conditioning units (CUACs), which it considered to have similar market behavior in response to consumer rebates. DOE gathered data on utility or agency rebates throughout the nation, and used this data to calibrate the customized penetration curves it developed for SPVUs so they can best reflect the market barrier level faced in the proposed

standard. S ection 17.3.2.2 shows the interpolated curve used in the analysis.

17.3.2.2 Analysis

For the SPVAC <65 product classes , DOE estimated t he effect of increasing their B/ C

ratio via a rebate that would pay part of the incr eased installed cost of a unit that met the target efficiency level compared to one meeting the baseline efficiency level

. d DOE based the rebate

amounts on a sample of util ity and agency rebate programs for single package CUACs. DOE gathered data on 7 rebates for CUACs initiated by 4 utilities or agencies in various States. (Appendix 17-A identifies the rebate programs .) To represent the rebate level, DOE used the simple average of the rebate amounts offered by these programs. DOE assumed that t his average rebate amount would apply to models with efficiency level at the target level for these product

classes

. DOE assumed that rebates would remain in effect at the same leve ls throughout the forecast period (2019–2048 ).

DOE first calculated the B/C ratio without a rebate using the difference in total installed

costs (C) and lifetime operating cost savings (B) between a unit meeting the target level and a

baseline unit. It then calculated the B/C ratio given a rebate for the unit meeting the target efficiency level

. Because the rebate reduced the incremental cost, the unit receiving the rebate had a larger B/C ratio. Table 17.3.1 shows the effect of con sumer rebates on the B/C ratio for the proposed TSL (TSL 2).

Table 17.3.1 Benefit/Cost Ratios Without and W ith Rebates for SPVAC <65

B/C Ratio Without Rebate 2.1 Rebate Amount (201 3 $) 205.71

B/C Ratio With Rebate 2.8

Calculated Market Barrier s Curve High

- xHigh

DOE used the se B/C ratios along with the penetration curve shown in Figure 17.3.1 to estimate the percentage of consumers who would purchase SPVUs that meet the target level both

d The baseline technology for each product class is defined in the engineering analysis, chapter 5, as the technology that represents the basic characteristics of products in that class . A baseline unit typically i s one that just meets current Federal energy conservation standards and provides basic consumer utility

.

17 -6with and without a rebate incentive. The penetration curve calculated by DOE to represent the

market behavior for SPVAC <65 units was close to the high barriers penetration curve.

Figure 17.3.1 Market Penetration Curve for SPVAC <65

DOE next estimated the percent increase represented by the change in penetration rate shown on the penetration curve. It then added that percent increase to t he market share of units

that meet the target level in the base case to obtain the market share of units that meet the target

level in the rebate policy case.

Table 17.3.2 summarizes DOEs assumptions for SPVAC <65 regarding the market penetration of SPVAC <65 in 2019 that meet the target efficiency level at the proposed TSL given a consumer rebate

. DOE assumed that the increase in market share seen in the first year of the p rogram would be maintained throughout the forecast period.

Table 17.3.2 Market Penetrations in 2019 Attributable to Consumer Rebates for

SPVAC <65

Base

- Case Market Share 1.1 Policy Case Market Share 1.9

Increased Market Share 0.8

DOE used the resulting annual increase in market share as the input t o represent the rebate policy case scenario in its NIA

- RIA model. Appendix 17-A shows the annual market share increases due to this policy. Section 17.4 presents the resulting efficiency trends for the policy case of consumer rebates for SPVAC <65. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

0 10 20 30 40 50 60 70 80 90 100Penetration Rate

Benefit/Cost Ratio

High Estimated xHigh No Rebate With Rebate

17 -717.3.3 Consumer Tax Credits

DOE estimated the effects of tax credits on consumer purchases based on its previous analysis of consumer participation in tax credits. DOE supported its approach using data from Oregon State’s tax credit program for energy

- efficient appliances. DOE also incorporated previous research that disaggregated the effe ct of rebates and tax credits into a direct price effect

, which deriv es from the savings in purchase price

, and an announcement effect , which is independent of the amount of the incentive. 10

, 11 The announcement effect derives from the credibility that a technology receives from being included in an incentive program, as well as changes in product marketing and modifications in markup and pricing. DOE assumed that the rebate and consumer tax credit policies would encompass both dire ct price effect s and

announcement effect s, and that half the increase in market penetration associa ted with either policy would be due to the direct price effect and half to the announcement effect.

In estimat ing the effects of a tax credit on purchases of consumer products that meet new efficiency standards, DOE assumed the amount of the tax credit wo uld be the same as the corresponding rebate amount discussed above.

DOE estimated that fewer consumers would participate in a tax credit program than would take advantage of a rebate. Research has shown that the delay required for a consumer to

receive a tax credit, plus the added time and cost in preparing the tax return, make a tax credit

incentive less effective than a rebate received at the time of purchase. Based on previous analyses, DOE assumed that only 60 percent of the consumers who would take advantage of a rebate would take advantage of a tax credit. 12

In preparing its assumptions to estimate the effects of tax credits on consumer purchases

of SPVAC <65 , DOE also reviewed other tax credit programs that have been offered at both the Federal and State levels for energy

- efficient appliances.

The Energy Policy Act of 2005 (EPACT 2005) included Federal tax credits for

consumers who purchase energy

- efficient products, including home heating and cooling products for new or existing homes. 13 Those tax credits were in effect in 2006 and 2007, expired in 2008, reinstated for 2009–2010 by ARRA, extended by Congress for 2011 with some modifications

, and expired at the end of 2011. 14

, 15 DOE reviewed Internal Revenue Service data on the numbers of taxpayers who claimed the tax credits during tax years 2006 and 2007. DOE also reviewed data from an earlier Federal energy conservation tax credit program in place in the 1980s. However, DOE did not find data specific enough to SPVUs to warrant adjusting its analysis method for th e Consumer Tax Credits policy case. Appendix 17-A contains more

information on Federal consumer tax credits.

DOE also reviewed its previous analysis on Oregon’s tax credits for clothes washers to provide support for its assumptions. 16 In that previous analy sis, DOE compared the market

shares of ultra -high efficiency (UHE) residential clothes washers in Oregon, which offered both State tax credits and utility rebates, with those in Washington State, which offered only utility

17 -8rebates during the same period. B ased on this analysis, DOE estimated that in Oregon the impact of tax credits was 62 percent of the impact of rebates for UHE clothes washers having equivalent efficiency. This finding supports its original assumption that participation in a tax credit pro gram would be about 60 percent of participation in a rebate program. Additional discussion of State

tax credits for Oregon and other states is in Appendix 17-A.

DOE applied the assumed 60 percent participation described above to the penetration

rates estimated for the rebate policy to estimate penetration rates attributable to consumer tax credits. In doing so, DOE incorporated the assumptions for consumer response to financial

incent ives from the penetration curve selected for SPVAC <65

.

Table 17.3.3 summarize s DOE’s assumptions for SPVAC <65 r egarding the market penetration of units in 2019 tha t meet the target efficiency level given a consumer tax credit.

D OE assumed that the increase in market share seen in the first year of the program would be maintained throughout the forecast period.

Table 17.3.3 Market Penetrations in 2019 Attributable to Consumer Tax Credits for

SPVAC <65

Base

- Case Market Share 1.1 Policy Case Market Share 1.6

Increased Market Share 0.5

The increased market share attributable to consumer tax credit s shown in Table 17.3.3

was used as an input to the NIA

- RIA model. Appendix 17-A shows the annual market share increases due to this policy. Section 17.4 presents the resulting efficiency trends for the policy

case of consumer tax credits for SPVAC <65 that meet the target efficiency level

.

17.3.4 Manufacturer Tax Credits

To analyze the potential effects of a policy that offers tax credits to manufacturers that produce SPVAC <65 that meet the target efficiency level, DOE assumed that a manufacturer tax

credit would lower the co nsumer’s purchase cost by an amount equivalent to that provided by the

consumer rebates or tax credits described above. DOE further assumed that manufacturers would pass on some of their reduced costs to consumers, causing a direct price effect. DOE assume d that no announcement effect would occur, because the program would not be visible to

consumers. e Because the direct price effect is approximately equiva lent to the announcement

effect

, 10 DOE estimated that a manufacturer tax credit would induce half the number of consumers assumed to take advantage of a consumer tax credit to purcha se more efficient

e Note that this is a conservative assumption, since it is possible that manufacturers or utility/agency efficiency programs might promote the models for which manufacturers increase production due to the tax credits, which in turn might induce some announcement effect. However, DOE found no data on such programs on which to base an estimate of the magnitude of this possible announcement effect on consumer behavior.

17 -9products. Thus the assumed participation rate is equal to 30 percent of the number of consumers who would participate in a rebate program.

DOE attempted to in vestigate manufacturer response to the Energy Efficient Appliance Credits for manufacturers mandated by EPACT 2005. 17 Those manufacturer tax credits were in

effect for SPVU models produced in 2006 and 2007, reinstated for 2009 and 2010, extended to
2011 with modifications in the el igibility requirements , and expired at the end of 2011. DOE was

unable to locate data from the Internal Revenue Service or other sources on manufacturer response to the Federal credits. Appendix 17-A presents details on Federal manufacturer tax

credits.

DOE applied the assumption of 30 percent participation to the penetration rates predicted for the rebate policy to estimate the effects of a manufacturer tax credit policy. In doing so, the Department incorporated the assumptions for consumer response to fi nancial incent ives from the penetration curve selected for SPVUs

.

Table 17.3.4 summarize s DOE’s assumptions for SPVAC <65 regarding the market penetration of units in 2019 meeting the target efficiency level given a manufacturer tax credit.

DOE assumed that the increase in market share seen in the first year of the program would be maintained throughout the forecast period.

Table 17.3.4 Market Penetrations in 2019 Attribut able to Manufacturer Tax Credits

for SPV AC <65

Base

- Case Market Share 1.1 Policy Case Market Share 1.3

Increased Market Share 0.2

The increased market share attributab le to a manufacturer tax credit shown in Table

17.3.4 was used as an input to the NIA

- RIA model. Appendix 17-A shows the annual market

share increases due to this policy. Section 17.4 presents the resulting market penetration trends for the policy case of manufacturer tax credits for SPVAC <65

.

17.3.5 Voluntary Energy Efficiency Targets

DOE assumed that voluntary energy efficiency targets would be achieved as manufacturers gradually stopped producing units that operated below the target efficiency level

. DOE assumed that the impetus for phasing out production of low-efficiency units would be a

program with impacts similar to those of the ENERGY STAR labeling program conducted by the Environmental Protection Agency (EPA) and DOE in conjunction with industry partners. The ENERGY STAR program specifie s the minimum energy efficienc ies that various products

must have to receive the ENERGY STAR label . ENERGY STAR encourages consumers to purchase efficient products via marketing that promotes consumer label recognition, various incentive programs that adopt the ENERGY STAR specifications, and manufacturers’ promotion of their qualifying appliances. ENERGY STAR proje cts market penetration of compliant

17

- 10appliances and estimates the percentage of sales of compliant appliances that are attributable to the ENERGY STAR program.

Researchers have analyzed the ENERGY STAR program’s effects on sales of several consumer products. Program efforts generally involve a combination of information dissemination and utility or agency rebates. The analyses have been based on State

- specific data
on percentages of shipments of various appliances that meet ENERGY STAR specifications. Th e analyses generally have concluded that the market penetration of ENERGY STAR

- qualifying appliances is higher in regions or States where ancillary promotional programs have been

active. 18

, 19

, 20

Since ENERGY STAR does not have a program aimed at SPVUs, DOE based its

est imates of market penetration on its previous estimates of the impact of a voluntary energy efficiency targets program on shipments of CUAC s. DOE chose CUACs as a product with a similar base case market share projection to that of SPVUs. In its prior analysis DOE as sumed

that the ENERGY STAR program would lead to a 0.6 percentage point annual increase in the

market share of ENERGY STAR -compliant CUAC equipment from throughout the forecast period. 21 DOE assumed that SPVUs wo uld experience this level of annual increase in ma rket penetration beginning in 2019 and lasting throughout the forecast period. DOE added those percent increases to the market share s of SPVAC <65 that met the target level in the RIA base

case , starting in 2019, to obtain the annual market shares of units meeting the target efficiency level in the voluntary energy efficiency targets policy case

.

Table 17.3.5 summarizes DOE ’s assumption for SPVAC <65 regarding the market penetration of units in 2019 that meet the target efficiency level given voluntary energy efficiency targets.

Table 17.3.5 Market Penetrations in 2019 Attributable to Voluntary Energy Efficiency Targets for SPVAC <65

Base

- Case Market Share 1.1 Policy Case Market Share 1.7

Increased Market Share 0.6

The increased market share attributable to voluntary energy efficiency targets shown in

Table 17.3.5 was used as an input to the NIA-RIA model. Appendix 17-A shows the annual market share increases due to this policy. Section 17.4 presents the resulting market penetration

tre nds for the policy case of voluntary energy efficiency targets for SPVAC <65 that meet the target efficiency level

.

17

- 1117.3.6 Early Replacement

The non- regulatory policy of early replacement refers to a program to replace residential appliances before the ends of their useful lives. The purpose of such a policy is to replace old, inefficient units with higher efficiency units. The economic feasibility of early replacement depends on the vintage of the unit being replaced, t he installed cost of the new unit, and the energy cost savings. DOE examined several resources to inform its analysis of th e policy. One report detailed the Connecticut Appliance Retirement Program (ARP), which was conducted in

2004. 22 Another was a 2006 study of the potentials for electric energy efficiency performed for

the State of Vermont. 23

The Connecticut ARP was conducted from June through December 2004 by Nexus Market Research, Inc., and RLW Analytics, Inc., for Northeast Utilities– Connecticut Light and Power and the United Illuminating Company’s State programs. The purpose of the ARP was to help Connecticut utility customers overcome barriers to recycling room air conditioners (RACs), secondary refrigerators, and freezers. The program picked up used appliances at customers’

homes o r at turn -in events, paid participants to retire their units, and educated customers about the costs of operating older appliances. In addition, the program provided consumers with financial incentives to replace inefficient RACs with ENERGY STAR

- qualified units. DOE considers the RAC program to most closely resemble the early replacement policy scenario for

SPVU s, because consumers replaced primary units rather than retiring second units. Nexus/RLW used program data and surveys to estimate the number of RA Cs retired by ARP participants, the percentage of retired units that were replaced with an ENERGY STAR model, and the number of RACs replaced by non -participants during the program. According to the Nexus/RLW analysis, about 7 percent of all RACs retired during the program were retired through the ARP, and 63 percent of those were replaced with ENERGY STAR models. Thus the program resulted directly in about 4 percent of total eligible RAC consumers deciding on early replacement of inefficient

units.

In 2006, GDS Associates, Inc. conducted a study for the State of Vermont of the potential for reducing electricity use and peak demand through energy efficiency and fuel conversion measures. The study took an aggressive, multi-program approach, one aspect of which was early replacement of appliances. GDS considered that under the program residential appliances, including RACs, would be replaced during 4 years (2006– 2009). GDS estimated achievable market penetrations assuming that consumers would receive a financial incentive equal to 50 percent of the incremental cost of each program measure. GDS assumed a maximum 80- percent penetration. For early replacement of RACs, GDS estimated a maximum achievable participation of 5 percent of eligible single- family or multi -family homes in the year before the program began (2005).

DOE also reviewed a study it had conducted in the 1990s, under EPACT 1992, which analyzed the effectiveness of Federal programs that support ed early retirement of appliances

. 24

Th e study identified policy options for early replacement that included a direct national program;

17

- 12replacement of Federally

- owned appliances; and promotion through product manufacturers, consumer incentives, incentives to utilities, and building regulations. f

For this RIA analysis, DOE analyzed a program to target installed units having efficiency levels lower than the target level and encourag e their early replacement with products that perform at the target level. DOE modeled th e effects of the early replacement policy by increasing b y 4 percent per year the retirement rate of units that were in the stock in the first year of the analysis peri od (2019) . DOE chose the 4- percent rate from the Connecticut study, because

it was based on actual program experience. DOE assumed that the early replacement program

would continue until it had facilitated the replacement of all eligible SPVAC <65 in the stock in the year the program began ( 2019 ). Shipments of new units in 2019 and beyond were not affected by th e program , but remained at base

- case efficiency levels. After the stock of

inefficient units was replaced completely, the policy would produce no additional impacts.

An early replacement policy would create a fairly immediate jump in shipments of

pr oducts that meet the target efficiency level relative to the base case. High

- efficiency units would be brought quickly into the stock, leading to an immediate gain in the market share of efficient units compared to the base case. As opposed to the policy c ases discussed previously,however, an early replacement policy results in market shares of efficient units returning to basecase percentages as the eligible market is depleted. In addition, because units removed early from the stock would have been repla ced later (at the ends of their use ful lives) without the program,

the number of shipments in later years drops slightly below the base

- case shipments forecast.

DOE used the additional shipments for early replacements to calculate the increase in

market penetration of more efficient units that would result from an early replacement policy.

Table 17.3.6 summarizes DOE’s assumptions for SPVAC <65 regarding the mark et penetration of units in 2019 meeting the target efficiency level given early replacement incentives.

Table 17.3.6 Market Penetrations in 2019 Attributable to Early Replacements for

SPVAC <65

Base

- Case Market Share 1.1 Policy Case Market Share 1.1

Increased Market Share 0.0

The resulting increase in market share attributable to early replacement shown in Table

17.3.6 was used as an input to the NIA-RIA model. Appendix 17-Ashows the annual market

f The analysis concluded that, although cost

- effective opportunities for early replacement exist, a widespread Federal

program was not justified economically. Because early retirement means that a unit may be replaced by an appliance less efficient than the eventual replacement would have been, energy savings would be less than anticipated. Early replacement programs also could increase long

- term sales volatility by encourag ing a temporary increase in production

, followed by a lull in demand. Early replacement could be economical in localities subject to high energy costs or environmental constraints ; when replacement appliances are much more efficient than existing

stock ; or when a major technology breakthrough has occurred, creating the need for a ready market.

17

- 13share increases due to this policy. Section 17.4 presents the resulting market penetration trends for the polic y case of early replacement for SPVAC <65

.

17.3.7 Bulk Government Purchases

Bulk government purchases can lead to Federal, State, and local governments purchasing large quantities of products that meet the target efficiency level . Combining the market demands

of mu ltiple public sectors also can provide a market signal to manufacturers and vendors that some of their largest customers seek products that meet an efficiency target at favorable prices. Such a program also can induce “market pull,” whereby manufacturers and vendors would achieve economies of scale for high efficiency products.

DOE assumed that the market penetration of SPVUs in government-owned buildings was very small and therefore that the energy sav ings would be minimal. Therefore it did not analyze the Bulk Government Purchases policy for this product.

17.4 IMPACT S OF NON

- REGULATORY ALTERNATI VE S

Figure 17.4.1 shows the effects of each non -regulatory policy on market penetration for

SPVAC <65 . R elative to the base case, the policy cases slightly increase the market shares that meet the target level. Note that th e proposed standards (not shown in the figures) would result in

a 100- percent market penetration of products that meet the target efficiency level.

Figure 17.4.1 Market Penetration of SPVAC <65 Units Meeting the Target

Level in Policy Cases 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%201920202021202220232024202520262027202820292030203120322033203420352036203720382039204020412042204320442045204620472048 Consumer Rebate

Consumer Tax Credit

Manufacturer Tax Credit

Voluntary Efficiency Targets

Early Replacement

Base case

17

- 14Table 17.4.1 shows the national energy savings (NES) and net present value (NPV) for

five non-regulatory polic ies analyzed in detail for SPVAC <65 . T he target level for each policy equal s the efficiency level in the corresponding proposed standard.

The case in which no regulatory action is taken with regard to SPVU s constitutes the base

case (or "No New Regulatory Action" scenario ), in which NES and NPV are zero by definition. For comparison, the tables include the impacts of the proposed standards. Energy savings are given in t rillion British thermal units (quads). The NPV s shown in Table 1 7.4.1 are based on two

discount rates, 7 percent and 3 percent.

Table 17.4.1 Impacts of Non- Regulatory Alternatives for SPVAC <65 (TSL 2 )

Policy Alternative Primary Energy Savings* (trillion BTU) Net Present Value* (m illion 201 3 $ )

7% Discount

Rate 3% Discount

Rat e

Consumer Rebates 0.8 0.8 2.4

Consumer Tax Credits 0.5 0.5 1.4

Manufacturer Tax Credits 0.2 0.2 0.7 Voluntary Energy Efficiency Targets 0.6 0.6 1.9 Early Replacement 0.0 0.0 0.0
Proposed Standards 125.7 13.4 129.6
*For products shipped 201 9

– 204 8

.

17

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